Eight economic indicators that have the biggest impact on the forex market
Here’s a look at eight economic indicators that have the biggest impact on the forex market.
1. gross domestic product (GDP)
GDP is the main measure of the overall health of an economy. The GDP compilation process takes so long that when it is finally released, many parts of it are already known. So often, expectations turn out to be quite accurate. But if there are any surprises in store, they can have a big impact on the market. Despite their lack of timeliness, GDP figures help us understand where we are in the business cycle.
2. Non farm payrolls
This is possibly the most important economic indicator for forex traders, released by the United States Bureau of Labor Statistics, on the first Friday of each month. The reason this report has such a large impact on forex prices is because the NFP’s employment data is historically closely correlated to GDP, and therefore can be used as a quick indicator of US GDP. Furthermore, this report influences the country’s monetary policy, given that stable prices and maximum employment are two of the Federal Reserve’s three monetary targets.
3. federal funds rate
Another US-based indicator, this one, was released by the Federal Open Markets Committee (FOMC), a committee of the Federal Reserve System. Its responsibilities include making important decisions regarding the growth of US money supply as well as interest rates. The Committee meets eight times a year as part of its schedule to set US monetary policy. The results of these meetings can directly affect the foreign exchange market. Statements released after each meeting serve as a guide to the Federal Reserve regarding the future course of its monetary policy. If the Fed changes the Federal Funds Rate or the perception of its monetary policy stance, it affects the US dollar. And since the USD is the world’s reserve currency, this has a cascading effect on other currencies.
4. consumer price index
Also known as the CPI, this is a measure of goods and services and is index-linked to a base starting point. It gives us an idea of how fast prices are rising or falling. This information is important because price stability is part of the US Fed’s dual mandate. Since inflation is directly related to monetary policy, the CPI report can have a huge impact on currency markets. Again, it is the deviation from the predicted results that usually has the biggest impact. For example, if the value of the CPI is much higher than expected, it signals that monetary policy will be tightened going forward. All else being equal, this could be bullish for the US dollar.
5. retail sales report
Advance Monthly Sales for retail sales, known simply as Retail Sales, are released two weeks into each month by the U.S. Census Bureau (a division of the U.S. Department of Commerce) at 8:30 a.m. ET. This report provides an estimate of the nominal dollar value of retail sales along with the percentage change in the figure from the previous month. Most forex traders follow the percentage change data more than the other content of the report. If there is a big difference between the expectations and the reported figure, it can have a significant impact on market prices. Another reason why this report is so popular is due to personal consumption expenditures (PCE). PCE is considered a major contributor to the growth of the US economy.
6. unemployment
In simple terms, the unemployment rate can be defined as the percentage of the labor force engaged in an active search for a job. During recovery periods, unemployment data act as a lagging indicator. Unemployment is also closely linked to consumer sentiment. A prolonged unemployment rate is extremely destructive to consumer sentiment, as it affects consumer spending and overall economic growth. Incidentally, a weakening US labor market is usually considered bearish for the US dollar.
7. Capacity utilization
This indicator helps to analyze the performance of the US manufacturing industry, counted as a share of its full capacity. Factors such as normal downtime are also taken into account. The indicator value is calculated as a ratio of the industrial production index to the full capacity index. Capacity utilization usually reflects the health of the manufacturing sector. It also highlights possible trends that are likely to emerge in the future, along with clues about inflation. History shows that rates below 78% point to a coming recession. It could also mean that the economy is already facing a recession.
8. industrial production index
This indicator measures the level of US output (in terms of material produced), compared to a base year, in three broad categories – mining, manufacturing and gas/electricity. The US Fed compiles the data and creates this report, which is published mid-month.
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