A:

The economic indicators used to forecast an exchange rate are the same ones used to determine the overall economic health of a country. The gross domestic product (GDP), consumer price index (CPI), producer price index (PPI), employment data and interest rates are all key determining factors of a country’s foreign exchange rates.

Exchange rates are among the top factors that distinguish the health of a country's economy. Also known as a forex rate, the foreign exchange rate is the value of the currency of one nation in relation to another nation's currency.
The GDP) of a country is a representation of the dollar value of goods and services that have been produced within that country, generally over the span of one year. The GDP may also be thought of as the basic size of the country's economy. Changes in the GDP reveal changes in economic growth and can directly impact the relative value of a country’s currency. A high GDP reflects larger production rates, an indication of a greater demand for that country's products. An increase in demand for a country's goods and services generally translates into an increased demand for the country's currency.

The CPI is another important indicator for investors and economists and is a metric for changes in price of a predetermined group of goods and services which are bought by households within a country. The CPI is used to track price changes and reflect inflation rates. A rise in prices on the CPI indicates a weakening in the purchase power of the country's currency. Especially high inflation relative to inflation rates in other countries magnifies the effect of this factor.

The PPI measures the average change in sale price of all raw goods and services, and it examines these changes from the viewpoint of the producer and not the consumer. The PPI and CPI are obviously interrelated; increased producer costs are most often passed on to consumers.

Employment data is another indication of a country's exchange rate. Higher employment rates are typically a sign of higher demand for production of the country's goods, so it is therefore a signal that the value of a country's currency is higher. Greater demand for products and services from a country results in an increase in the number of workers required to meet the demand. Higher demand usually means a country is doing more exporting, and more foreign currency is being exchanged in favor of the home country.

One final indicator widely used to forecast the exchange rate of a country is the interest rate set by its central bank. A country offering higher interest rates is usually more appealing to investors than a country offering relatively lower rates.

RELATED FAQS
  1. Which countries are most productive in terms of GDP?

    Countries around the world constantly compete with one another to be the most innovative and productive. Read to see which ... Read Answer >>
  2. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  3. Is it possible for a country to have a comparative advantage in everything?

    Learn whether one country can have a comparative advantage in everything and what the difference between comparative advantage ... Read Answer >>
  4. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
Related Articles
  1. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  2. Trading

    Interest Rate and Currency Value And Exchange Rate

    In general, higher interest rates in one country tend to increase the value of its currency.
  3. Insights

    Deadly Flaws in Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect.
  4. Investing

    The Pros And Cons Of A Pegged Exchange Rate

    A pegged exchange rate occurs when one country fixes its currency’s value to the value of another country’s currency. But it has both pros and cons.
  5. Trading

    Predict Inflation With The Producer Price Index

    Find out how the PPI can be used to gauge the overall health of the economy.
  6. Trading

    5 Reports That Affect The British Pound

    The pound is one of the world's most popular traded currencies, and is heavily impacted by these factors.
  7. Trading

    Economic Factors That Affect The Forex Market

    Keep pace in the competitive and fast-moving foreign exchange (forex) markets by knowing the economic factors and indicators to watch.
  8. Insights

    How to Calculate the GDP of a Country

    The GDP of a country can be calculated using two different approaches.
  9. Insights

    Top 25 Developed and Developing Countries

    The difference between developed and developing countries, along with a list of the status of 25 nations around the world.
RELATED TERMS
  1. Net Exporter

    A net exporter is a country or territory whose value of exported ...
  2. Country Limit

    Country limit is the aggregate limit that a bank places on all ...
  3. Terms of Trade - TOT

    Terms of trade represent the ratio between a country's export ...
  4. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services ...
  5. Tariff War

    An economic battle between two countries in which Country A raises ...
  6. Currency Substitution

    Currency substitution is the use of a foreign currency in transactions ...
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center