5 Macroeconomic Indicators Used By Forex Traders
Indicator 1) Gross Domestic Product (GDP)
Indicator 2) Inflation Rates
Indicator 3) Non-Farm Payrolls (NFP)
Indicator 4) Interest Rates
Indicator 5) Consumer Confidence Index (CCI)
There are many Economic Indicators used in the Forex Market. In order to be a successful trader it is important to understand how each of these indicators impact pricing and how they are inter-related. Economic indicators are a very important part of understanding Fundamental Analysis. They are important because central banks use them to measure the health of an economy which has a huge impact on the up and down movement of currency valuation.
When you learn to trade the Forex market it is essential to learn about Fundamental Analysis which we cover in our free Forex course. In this article we share our view on five of the main indicators used to understand Economic Trading in Forex.
Indicator 1: Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is probably the broadest economic indicator that is used by countries. It is an important economic indicator that can really impact a countries currency so needs to be understood when you learn to trade the Forex market.
GDP can be summarised as the sum or measure of the market value of all the goods and services produced within a specific time period. It does not include the cost of living and inflation rates of the countries. Most traders focus on a percentage change of the GDP which reflects the true direction of a countries economy i.e the growth of the economy over a period of time such as a quarter or annual change.
When the GDP measure is up on the previous three months, it is a sign that the economy in that country is generally growing meaning more wealth and more jobs. Typically this will lead to an increase in the currency in that specific country meaning traders will BUY the currency as the economy is strong (all else being equal).
When the GDP measure is down on the previous three months, it is a sign that the economy in that country is generally shrinking meaning less wealth and less jobs. Typically, this will lead to a decrease in the currency in that specific country meaning traders will SELL the currency as the economy is weaker (all else being equal).
|GDP Increase||Higher Wealth, More Jobs||BUY|
|GDP Decrease||Less Wealth, Fewer Jobs||SELL|
If you’re interested in learning more about Economic Indicators and Fundamental Analysis, you can check out our free Forex course.
Indicator 2: Inflation Rates
Inflation rates are a measure of the change in prices of goods and services also measured over a specific period of time. It is an important indicator to understand when learning Economic Trading in Forex. Typically the main inflation indicators to watch are the Consumer Price Index (CPI) or the Producer Price Index (PPI). CPI compares the current cost of a basket of goods to the same basket during a different period. PPI is a group of indexes that calculates and represents the average movement in selling prices from domestic production over time.
Many central bans have an inflation rate target. It is the policy makers job to meet their inflation targets by changing monetary and/or fiscal policies which involves increases or decreasing the money supply. This in turn affects the currency valuation.
Higher inflation rates means that the cost of goods and services increases. Lower inflation rates means the cost of goods and services has decreased. Extremely high inflation rates can lead to hyperinflation which can be devastating to an economy. Zimbabwe is a country which can be used as a prime example of hyperinflation as inflation spiraled out of control to over 100%. The Zimbabwean Dollar became almost worthless with simple goods such as bread increasing to $10 a loaf!
Typically an increase in inflation can be healthy as it usually occurs due to positive economic conditions. Many countries target a slightly positive inflation rate of around 2% as this figure is considered beneficial to the economy. Usually when a countries inflation rate is sat around the 2% mark. When this occurs the currency is likely to be in a good place and therefore a good candidate to increase in value.
Indicator 3: Non-Farm Payrolls (NFP)
Non-farm payrolls is another important Economic Indicator that should be considered when using Fundamental Analysis. It is a monthly statistic in the USA that analyses how many people are employed in manufacturing, construction and goods companies. It excludes agricultural workers and those who work in private households or non-profit organisations.
While the NFP figure is a critical figure for the US economy it is also one that must be followed as the US Dollar is so important to the world economy therefore this must be understood.
The NFP figure is released on the first Friday of each month. It’s headline figure represents the number of jobs added or lost in the economy. This is usually over a one-month period and compared with the previous months figure. Forex traders from all over the world watch for the number with a keen eye as the numbers announcement will more than likely move the Forex market.
Indicator 4: Interest Rates
Interest rates are a major driver in the Forex market. They commonly linked to many of the other important economic indicators we have covered in this article. A central bank can decide if they increase, decrease or leave interest rates unchanged all dependent on the current overall health of the economy. Interest rates are used in the distribution of credit and savings. It can be associated with the cost of attaining credit on lower interest rate to encourage people to borrow. Likewise a higher interest rate can encourage people to save as they accumulate the interest in a savings account.
The lower the interest rate then the more willing people will borrow money to make larger purchases. When consumers have to pay less in interest it gives them more money to spend. This has a positive knock on effect in the economy. The ripple effect spreads from consumer to retailers or service providers. More trade is done and businesses are likely to earn more as consumers spend more.
Likewise the higher the interest rate means less spending in the economy as consumers have a lower disposable income. This cutback in spending means that the same retailers or service providers do less trade. Consumers spend less and are more likely to save.
Typically a currency with a higher interest rate will increase against a currency with a lower interest rate (all else being equal). Many traders buy currencies with a higher interest rate to trade the Carry Trade strategy.
|Interest Rate Increase||Stimulates Saving||BUY|
|Interest Rate Decrease||Stimulates Spending||SELL|
Indicator 5: Consumer Confidence Index (CCI)
As the name suggests, this economic indicator measures consumer confidence. The number is usually released on the last Tuesday of each month (in the US). Its main measure is how confident people feel about their income stability. This then has a direct effect on their economic decisions. In other words it influences their spending activity.
The CCI is a very USD focused economic indicator. Furthermore it is a good measure for consumer sentiment across the world economy. Generally when the CCI is higher, there is more confidence then likely the USD will be stronger.
What to do next?
There are two actionable things you can do to keep learning about Economic Indicators
- Enrol on our free Forex course.
- Watch the Everything Trading Economic Calendar to keep up to date with economic announcements.