In the fast-paced world for forex trading, knowledge is power.
Official economic reports and insights released by government and non-government agencies, have the potential to stir up waves that end up affecting market prices all around the globe.
Whether you are a beginner or a seasoned veteran, keeping a watchful eye on key Economic Indicators is vital for navigating the vast financial seas. By regularly monitoring these global economic indicators, you can make more informed decisions, and position yourself to take advantage of potential opportunities in the financial markets.
Economic indicators: what they are, and why they matter
Economic indicators can paint a picture of present, past, or potential future economic activity. The ones that try to predict what is to come, known as leading economic indicators, are usually the ones that traders find the most intriguing. The challenge? Identifying the high-impact indicators for forex trading amidst an overwhelming multitude of daily data. This guide aims to clear the fog with an easy-to-digest rundown of six key Economic Indicators.
These indicators bear considerable influence on financial markets, especially in the US, as the world’s largest economy. Regarding equity markets, given the predominance of the US stock market, it often sets the tone for other equity markets, leading to a domino effect of sentiment and trading activity. The US economy’s performance can influence overall global economic sentiment and risk appetite. And so, positive developments in the US often lead to increased optimism and risk-taking behaviour across global markets.
However, it is important to recognise that while the US economy plays a central role in global markets, other major economies, such as China, the European Union, and Japan, also have considerable impacts on the world economy and interact with each other in complex ways. The interconnectedness of global markets means that events in one region can quickly transmit to other regions, which has investors considering the broader global economic context when making investment decisions.
Aside from the US dollar, other currencies that are closely watched by traders include the Eurozone, Canada, New Zealand, Australia, UK, Japan, and Switzerland. Their currencies are at the heart of most global transactions, providing liquidity and influencing market quotes.
The six key economic indicators below are focused on the US, for ease of reference:
- Gross Domestic Product (GDP):This is the broadest measure of economic activity within a country, representing the total value of all goods and services produced over a specific period. The US GDP figure is usually announced on a quarterly basis.
- Nonfarm Payrolls (NFP): This important monthly indicator tracks the number of paid workers in the US, excluding farm workers and a few other job types. The NFP figure is announced on the first Friday of every month. It can point out labour market trends and wage inflation. It can also create large-price movements in the currency market, especially if the NFP figure is different from what is expected. You therefore should be ready to act swiftly to benefit from any volatility.
- Unemployment rate:A vital health-check for any economy, this measures the number of jobless individuals who are actively seeking employment as a percentage of the labour force. The US unemployment rate is announced monthly.
- Interest rates: Set by central banks, interest rates can stimulate or slow economic growth. Low rates encourage borrowing and investment, while high rates are used to reduce inflation. Here too, the US plays a leading role – decisions made by the US Federal Reserve regarding interest rates and monetary policy have broad implications for global markets. Changes in US interest rates can influence capital flows, borrowing costs, and investment decisions across the world.
- Consumer Price Index (CPI): Released monthly, the CPI measures average change in prices over time that consumers pay for a basket of goods and services, commonly used to gauge inflation.
- Retail sales: Announced monthly, US retail sales are a timely indicator of broad consumer spending patterns, often used to predict future performance of an economy.
Armed with knowledge of these key economic indicators, even newcomers can gain a comprehensive understanding of the economic landscape and be in control of their forex trading decisions.
By Theo Theodorou, Certified Financial Technical Analyst, Admirals
Theo Theodorou (MSc, MSTA, CFTe) is a Certified Financial Technical Analyst and Global Educator at Admirals in Cyprus.
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Trading involves risk.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.