In the previous article, we already talked about the types of fundamental analysis and classification of economic news. It's time to delve deeper into the topic. Today we will look at 5 types of economic indicators and find out how they affect the foreign exchange market and why. Let's get started.
What is an Economic Indicator?
In Forex trading, economic indicators are news and data releases that provide information about the economic health and it's performance. Analysts interpret and use key indicators to plan future market strategies and use trading opportunities.
Labor Market Statistics
This indicator is a leader of our list for a reason. The employment level, unemployment rates, and the creation of new jobs most clearly indicate the current state of the economy in the country. The more people have a job, the higher their level of earnings, and the higher the level of consumer spending. This leads to economic growth. That is why economists and policymakers actively use these market statistics. Many central banks, and even the US Federal Reserve, rely on these numbers when building their monetary policy.
About 80% of the total turnover in the Forex market is traded in US dollars. That is why labor market statistics in the United States deserve maximum attention. Most of the data you need is published on the first Friday of every month. They include:
- Non-Farm Payrolls - number of employees in the non-agricultural sector
- Unemployment rate
- Average hourly earnings
Non-Farm Payrolls data often cause 100-150 pips jumps in the market. Many traders try to avoid charts at such periods while others try to make money on it.
Inflation Rate
This is another driving indicator for Forex traders. The inflation rate shows the change in the cost of services and goods for a certain period.
Many central banks, such as the Fed and BoE, have set inflation targets. They try to achieve these goals through deliberate changes in fiscal and monetary policies.
Forex traders can learn about inflation levels from the Consumer Price Index (CPI) and the Producer Price Index (PPI). Data for the previous month is published in the middle of each next month.
There are several types of inflation:
- Negative - causes a decrease in the economy level.
- Positive - the type of inflation policymakers try to adhere to. A 2% inflation increase is considered useful for the economy.
- Hyperinflation is an extremely high inflation rate that can completely destroy the country's economy. As a rule, it is controlled by tightening monetary policy.
GDP
Gross domestic product most accurately indicates the economic situation of the country. GDP shows the market value of all goods produced over time.
There are several key reports on GDP. The greatest impact on the foreign exchange market has an advance report. The US Bureau of Economic Analysis publishes its reports quarterly. You can evaluate further currency rates using forecasts and real indicators:
- If GDP exceeds forecasts then the US dollar is likely to grow
- A declining level of GDP leads to a drop in the value of USD
Retail Sales
Another important indicator of the economy level. The more people spend money, the better the financial situation in the country.
The level of retail sales affects many economic indicators:
- GDP
- Increase in corporate earnings
- Growth in the national currency value
- Increased investment volumes, etc.
Predicting the level of retail sales can be very difficult. However, the following indicators may help you:
- Unemployment rate
- Consumer sentiment - optimistic or negative
- The level of spending during holidays, etc.
Central Bank Meetings
Tracking the results of such meetings will tell you about changes in interest rates and possible tightening or loosing of the monetary policy.
For instance, the Federal Open Market Committee (FOMC) regulates the US monetary policy by purchasing or selling government bonds:
- The sale causes an increase in interest rates and a tightening of monetary policy due to a reduction in the available money supply.
- Buy provokes policy loosening and lower rates
Final Words
Of course, there are many more important and useful news events in the economic calendar. However, the indicators from this article are the main ones. Using them, you can easily assess the current economic state in the country and its potential impact on the price of the national currency.