The 10 Economic Indicators and Events All Forex Traders Need to Watch.
There are a number of different economic reports and indicators put out throughout the year, and each can have a very significant impact on your forex trading efforts.
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If you’re a casual trader currently improving your forex awareness and looking for ways to boost your output through new skills and strategies, then you’ve come to the right place. There are a number of different economic reports and indicators put out throughout the year, and each can have a very significant impact on your forex trading efforts. In this guide, you’ll find clear definitions of the 10 leading economic indicators, as well as information on how they affect the forex market.
U.S. Non-Farm Payrolls (NFP)
Released on the first Friday of every month, this indicator is one of the most important reports on the calendar for a lot of forex traders. U.S. Non-Farm Payrolls are released in line with the Employment Situation Report by the Bureau of Labor Statistics (BLS), so this report has a lot of power behind it. One reason for this is the timing of the report, because the business cycle and employment levels are closely related. Historically, any changes in the non-farm payrolls have moved very closely with quarterly GDP changes, meaning that, essentially, non-farm payrolls can be used as a sort of proxy for the GDP. The main difference between the GDP and non-farm payrolls is that the latter are released on a monthly basis, while the former comes out only quarterly and typically with a delay.
Another reason that this report is so popular among traders is the fact that it has a lot of impact on monetary policy, which makes it more or less impossible to ignore. There is a dual mandate with two key goals that the Federal Reserve keeps in mind: stable prices and maximum employment. As a result, employment data has a substantial effect on perceptions about the market and the future of monetary policy in general.
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U.S. Federal Interest Rates.
Another huge influence on the foreign exchange market are any changes in interest rates that are made by one or more of the eight major central banks around the globe. These changes are responses, albeit indirect ones, to other economic indicators that appear throughout the month. The one thing that these reports have that is so important is the ability to change the market suddenly and drastically, potentially sending shockwaves toward any forex trader. It’s important that traders understand and learn how to react—and even predict—these incredibly volatile moves, as doing so can make surprise rate changes lead to higher profits, and at a minimum, dampen any potential portfolio damage.
The reason that U.S. federal interest rates are so critical when it comes to forex traders is simple: More interest applied on a higher rate of return equals more profit. There is a risk to this strategy, though, primarily in the fluctuation of currency, which can be very dramatic and offset any rewards you may get from interest. It’s not always wise to buy high-interest currency with low-interest currency, nor is it that easy, either.
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US Federal Funds Rate.
The Federal Open Markets Committee (FOMC) holds their meetings eight times a year to determine the monetary policy of the United States. If there is any deviation from what’s expected by market analysts, the outcomes of these meetings can drastically affect the forex market. One of the most important things when it comes to forex rates is the interest rate level of the currencies involved, as well as the expectations of those interest rates. If the FOMC makes any change to the rate of the federal funds, it can make a significant difference to the value of the USD.
After every FOMC meeting, a statement is released that offers guidance about the expected path of monetary policy, which should help forex traders steer the course better. A fairly recent development, this statement is released partially in order to reduce volatility in markets such as forex, as well as to provide greater transparency overall. However, this guidance also has a lot of force behind it to move markets, just as if it were an actual policy change, making it at times resemble a double-edged sword.
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Gross Domestic Product (GDP)
The Gross Domestic Product report (GDP) is a wide measure of the ultimate and overall economic health of any particular nation. In actuality, this report tends to come out muted—as in, it doesn’t have much of an effect on the forex market, because by the time it comes out, a good portion of its components are already public, resulting in reasonably accurate expectations. However, it is important to note that divergences on this report can still move the market massively, despite its timing.
Ultimately, the GDP is one of the most important indicators for any forex trader to pay attention to, because it lets you know where you stand in the business cycle. In economics in this day and age, understanding the business cycle is key. It has two phases: expansionary, where the economy grows in many areas simultaneously, and recessionary, where the economy contracts in many areas simultaneously. The GDP is the widest measure of the economy and its activity, and so economists determine where in the business cycle we stand by studying growth and contraction in the report. A recession is technically defined by two consecutive quarters of contraction, and it ends as soon as we see a quarter of growth in the GDP.
Economic analysts—as well as politicians and policy-makers—heavily focus on this indicator, largely because it is so comprehensive. The GDP is vital to investment banks that take a top-down approach to analyzing the forex market’s macroeconomics.
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Consumer Confidence Index.
Technically, this takes the form of two reports: the Consumer Confidence Index (CCI) by the Conference Board, and the Consumer Sentiment Index by the University of Michigan. Though many consumer questionnaires exist, these two reports are arguably the most well-known and easily the most followed by traders and economists alike. The same thing that pushes forward the American economy at its core—active consumer spending—drives these two reports. Consumer confidence gives traders insight into how consumers feel. For example, if they feel safe in their employment and ultimately good about their short-term future finances and economics, they are logically more likely to go and spend more money, which drives economic growth. On the other hand, consumers that aren’t confident in their jobs and economic futures won’t go out and spend. Either way, pessimistic or optimistic, consumer confidence has a strong effect on the economy.
The CCI is released at the close of every month, while the Consumer Sentiment Index is released twice a month. What this essentially means is that there is a preliminary finding on the last Friday of the month, and then the last estimate at the end of the month. These two reports have an especially lasting impact when the business cycle is in the midst of or close to a turning point. Customer sentiment and confidence can signal a bullish upturn or a bearish downturn.
Consumer Confidence Indexes are common in many other economies too, like the Eurozone, UK and Australia. These will move the currencies of the economy either positively or negatively depending on the strength of each months reading.