Forex Walkthrough


Level 1 Forex Intro - Economics

Similar to the stock market, traders in forex markets rely on two forms of analysis: technical analysis and fundamental analysis. Technical analysis is used similarly in stocks as in forex, by analyzing charts and indicators. Fundamental analysis is a bit different – while companies have financial statements to analyze, countries have a swath of economic reports and indicators that need to be analyzed.

In order to analyze how much you think a country's currency is worth, you need to evaluate the economic situation of the country in order to more effectively trade currencies. In this section, we'll take a look at some of the major economic reports that help traders study the economic situation of a country.

Economic Indicators
Economic indicators are reports that detail a country's economic performance in a specific area. These reports are usually published periodically by governmental agencies or private organizations. Although there are numerous policies and factors that can affect a country's performance, the factors that are directly measurable are included in these economic reports. (For a comprehensive overview of economic indicators, check out our Economic Indicators Tutorial.)

These reports are published periodically, so changes in the economic indicators can be compared to similar periods. Economic reports typically have the same effect on currencies that earnings reports or quarterly reports have on companies. In forex, like in most markets, if the report deviates from what was expected by economists or analysts to happen, then it can cause large movements in the price of the currency.

Below are some of the major economic reports and indicators used for fundamental analysis in the forex market. You've probably heard of some of these indicators, such as the GDP, because many of these also have a substantial effect on equity markets.

The Gross Domestic Product (GDP)
The GDP is considered by many to be the broadest measure of a country's economic performance. It represents the total market value of all finished goods and services produced in a country in a given year. Most traders don't actually focus on the final GDP report, but rather on the two reports issued a few months before the final GDP: the advance GDP report and the preliminary report. This is because the final GDP figure is frequently considered a lagging indicator, meaning it can confirm a trend but it can't predict a trend, which is not very useful for traders looking to indentify a trend. In comparison to the stock market, the GDP report is somewhat similar to the income statement a public company reports at year end. Both give investors and traders an indication of the growth that occurred during the period. (See the Gross Domestic Product (GDP) section in our Economic Indicators Tutorial for more.)

Retail Sales
The retail sales is a very closely watched report that measures the total receipts, or dollar value, of all merchandise sold in retail stores in a given country. The report estimates the total merchandise sold by taking sample data from retailers across the country. Because consumers represent more than two-thirds of the economy, this report is very useful to traders to gauge the direction of the economy. Also, because the report's data is based on the previous month sales, it is a timely indicator, unlike the GDP report which is a lagging indicator. The content in the retail sales report can cause above normal volatility in the market, and information in the report can also be used to gauge inflationary pressures that affect Fed rates. (Refer to our Inflation Tutorial for a primer on inflation.)

Industrial Production
The industrial production report, released monthly by the Federal Reserve, reports on the changes in the production of factories, mines and utilities in the U.S. One of the closely watched measures included in this report is the capacity utilization ratio which estimates the level of production activity in the economy. It is preferable for a country to see increasing values of production and capacity utilization at high levels. Typically, capacity utilization in the range of 82-85% is considered "tight" and can increase the likelihood of price increases or supply shortages in the near term. Levels below 80% are usually interpreted as showing "slack" in the economy which might increase the likelihood of a recession. (Be sure to also check out our Federal Reserve Tutorial so you understand the role of one of the most important players in forex markets.)

Consumer Price Index (CPI)
The CPI is an economic indicator that measures the level of price changes in the economy, and is the benchmark for measuring inflation. Using a basket of goods that is representative of the goods and services in the economy, the CPI compares the price changes on this basket year after year. This report is one of the more important economic indicators available, and its release can increase volatility in equity, fixed income, and forex markets. The implications of inflation can be a critical catalyst for movements in the forex market. (Learn about some of the concerns about the CPI calculation in The Consumer Price Index Controversy.)

This is just a brief overview of some of the major reports you should be aware of as a new forex trader. There are numerous other reports and factors that can affect a currency's value, but here are some tips to keep in mind that will help you keep on top of your game.

Know when economic reports are due to be released. Keep a calendar of release dates on hand to make sure you don't fall behind. Quite often, the markets will also be volatile before the release of a major report based on expectations.

Forex Brokers
Related Articles
  1. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  2. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  3. Mutual Funds & ETFs

    Passively Managed Vs. Actively Managed Mutual Funds: Which is Better?

    Learn about the differences between actively and passively managed mutual funds, and for which types of investors each management style is best suited.
  4. Investing Basics

    3 Alternative Investments the Ultra-Rich Usually Own

    Learn about the ultra rich and what normally comprises their net worth; understand the top three alternative investments usually owned by the ultra rich.
  5. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  6. Investing

    Baby Boomer Philanthropy Shifts Wealth Adviser Focus

    Wealth advisers who integrate philanthropy and finance planning can stand out with baby boomer clients.
  7. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  8. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  9. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  10. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  1. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based ...
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  4. Liquidity

    The degree to which an asset or security can be quickly bought ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. Can mutual funds only hold stocks?

    There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
  3. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  4. Do mutual funds pay interest?

    Some mutual funds pay interest, though it depends on the types of assets held in the funds' portfolios. Specifically, bond ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Do mutual funds pay dividends?

    Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!