Charting and chart patterns provide a way for you to identify trading opportunities based on trader psychology. Likewise, a shift in the fundamentals of a country's economic state will definitely have an impact on its currency's value. Therefore on a day-to-day or week-to-week basis, economic data has a very significant impact on a currency's value. More specifically, changes in interest rates, inflation, unemployment, consumer confidence, gross domestic product (GDP), political stability etc. can all lead to extremely large gains/losses depending on the nature of the announcement and the current state of the country. If you didn't understand any of the terms in that last sentence, don't worry it will be explained next.
Listed below are a number of economic indicators that are generally considered to have the greatest influence - regardless of which country the announcement comes from.
On a regular basis, the majority of countries release data about the quantity of people employed. In the U.S., the Bureau of Labor Statistics releases employment data in a report called the non-farm payrolls, on the first Friday of each month. Generally, sharp increases in employment indicate prosperous economic growth. Likewise, potential contractions may be imminent if significant decreases occur. While these are general trends, it is important to consider the current position of the economy. For example, strong employment data could cause a currency to appreciate if the country has recently been through economic troubles, because the growth could be a sign of economic health and recovery. Conversely, in an overheated economy, high employment can also lead to inflation, which in this situation could move the currency downward.
Inflation data indicates the change of price levels over a period of time. Due to the sheer amount of goods and services within an economy, a basket of goods and services is used to measure changes in prices. American inflation data is represented with the Consumer Price Index (CPI), which is released on a monthly basis by the Bureau of Labor Statistics. Greater than expected price increases are considered a sign of inflation, which will likely cause the country's underlying currency to depreciate.
Gross Domestic Product
A country's gross domestic product (GDP) is a total of all the finished goods and services that a country has generated during a given period. GDP is calculated from private consumption, government spending, business spending and total net exports. American GDP information is released by the Bureau of Economic Analysis once monthly during the latter end of the month. GDP is often considered the best overall indicator of an economy's health, because GDP increases signal positive economic growth.
The healthier a country's economy, the more attractive it is for foreign investors to invest into the country. The increased demand for the country's currency will ultimately increase the value of its currency.
Retail sales data indicates the amount of retailer sales that are generated during a period of time. This figure serves as a proxy of consumer spending levels. The measure uses the sales data from a group of different stores to get an idea of consumer spending. The strength of the economy can also be determined, as increased spending signals a strong economy. American retail sales data is reported by the Department of Commerce during the middle of each month.
Macroeconomic and Geopolitical Events
The biggest changes in the forex market often come from macroeconomic and geopolitical events such as wars, elections, monetary policy changes and financial crises. These events have the ability to change or reshape the country, including its fundamentals. For example, wars can put a huge economic strain on a country and greatly increase the volatility in a region, which could impact the value of its currency. It is important to keep up to date on these macroeconomic and geopolitical events.
There is so much data that is released in the forex market that it can be very difficult for the average individual to know which data to follow. Despite this, it is important to know what news releases will affect the currencies you trade. (For more insight, check out Trading On News Releases and Economic Indicators To Know.)
Now that you know a little more about some of the general economy news events that can affect a currency, we will next focus upon learning in depth about one specific aspect of a country's economic status. Interest rates are one of the most watch economic indicators by forex traders. Learn why by continuing to the next section of the walkthrough.