Economic Indicators that Drive the Forex Market
10 Factors that are crucial for the Forex Market
The fact that the foreign exchange market is gaining so much traction globally is a clear sign that macroeconomic elements from different corners of the world all affect the forex market.
The rate of any given currency is primarily determined by its country’s overall economic situation, and the overall economic situation is a sum of many macroeconomic elements.
There are three most important economic indicators; leading, coincident, and lagging. Traders ought to keep an eye out for all of these reports, also known as economic indicators.
They provide an analysis of current economic performance and projections for future economic performance. The economic indicators consist of indices, earnings, stock market prices, industrial production, interest rates, unemployment rate, GDP, retail sales, CPI, quit rate, and many more.
The economic indicators consist of indices, earnings, stock market prices, industrial production, interest rates, unemployment rate, GDP, retail sales, CPI, quit rate, and many more
Gross Domestic Product (GDP)
GDP measures the total production of goods and services in a country, usually on an annual basis. When the GDP is high, it is a sign that the economy is prospering. When the GDP is low, that can be an indicator of a weakening economy.
This is one of the most important drivers of the forex market. The base interest rate of a country is set by its respective central bank, which raises it to curb inflation or lowers it to promote growth – depending on the general economic environment. High-interest rates are indicators of a strong economy and attract investments because they imply an increase in demand and higher return.
Retail sales are a very good indicator of how a large proportion of the population is spending money. Strong retail sales indicate that consumers have money to spend and are confident in the economy. Mortgage rates and housing sales are a major part of retail sales, which, when strong, have a very positive effect on the forex market.
This measures the percentage of the labor force that does not have a job and is actively seeking employment. Unlike most other indicators, a low unemployment rate is a good sign. High unemployment rates imply that the local currency is weak and may decline even further.
Consumer Price Index (CPI)
As the name suggests, this report measures the cost of goods and services. It is important because it demonstrates how fast prices are rising or falling, which in itself is an indicator of inflation.
Central Bank Announcements
The central bank is responsible for the policies that get passed in the relevant country. For example, in the US, the Federal Open Market Committee (FOMC) executes open market operations. FOMC buys and sells government bonds, which determines the money supply, which in turn determines the interest rates.
If there is any speculation of geopolitical instability in a country, it will significantly affect the currency movements because investors look for stable countries and economies to invest in. A geopolitical incident can lead to loss of confidence and have adverse effects on the market. In times of turmoil, investors usually favor safe-heavens and liquidity.
Stock Market Performance
Stock market indices are very handy in doing something that the GDP report cannot – potentially providing early warning signs. While the GDP report is a good indicator of the economic growth rate, it is reported after the fact. A sustained and significant decline in the stock market can be perceived as an early sign of recession.
Commodities like oil and gold can be helpful economic indicators. If a country’s currency is tightly linked to a commodity that it produces, it can greatly impact its economy. Examples of such countries are Canada and Russia. If the price of the commodity plummets, so will the currency.
Terms of Trade
This is a ratio of export prices to import prices. If the price of exports rises against the price of imports, then a country’s terms of trade have improved. As a result, there is higher revenue, which causes higher demand and increases the value of the currency.
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There is a very high degree of risk involved in trading securities.
With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection, and market volatility that may substantially affect the price or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses. Learn more at Wikipedia.
All investments involve risks and are not suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against the loss, in a down market.
There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. More details here.
Looking for more information on brokers and trading? Have a look at our trading guides:
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