A Beginner's Guide to Economic Indicators -THE COMPLETE 2020 GUIDE
The economic factors surrounding Forex are numerous and complex, so it is extremely difficult to form a complete understanding of them. But, armed with useful knowledge, you will be able to navigate in the background of currency quotes fluctuations.
The main factors affecting the currency rate in Forex are capital flows, inflation, interest rates, political stability, and the most important one here is economic indicators.
Economic factors and what`s their role
Traders make decisions based on global economic factors. To make it clear, the exchange rate depends on how healthy the economy is.
The economic situation is defined based on economic events and daily changing data that maintain the perpetual running of the international currency market. Attention should be paid to some aspects that influence the economic situation and exchange rates.
For more than 80 percent of transactions that are instantly associated with the USD, many traders take into consideration the state of the US economy and its data on fundamental indicators.
Anticipated performance forecasts and economic performances can be interpreted via these indicators. The indicators’ cycles range from one indicator to the other: some are daily, others monthly and several are quarterly. Before the indicator happens, there are speculations caused by leading financial figures, and traders who base their actions on those speculations. An economic situation has a double impact – first when announced and second when matched to the speculations made earlier. A significant difference among the speculation and the actual figure may and will provoke volatility in the market.
Professional traders are guided by a number of major global indicators in the U.S. there are a number of major global indicators from which professional traders are guided. Here are some of them:
GDP (Gross Domestic Product) - gross domestic product, which estimates the entire value of products and services produced both at home and abroad. Its level is expressed in both current and basic prices, which allows us to express the real market value of products and assess the dynamics of the economic growth of the country.
CPI (Consumer Price Index) - Consumer price index, which is reflected as the price of a constant consumer basket of goods and services. CPI growth is the main indicator of inflation, and leads to a fall in stock prices, and increased interest rates in credit markets.
Consumer Confidence is an indicator that shows the level of confidence of individual households in the sustainability of the economy, right now and in the future. The optimistic sentiment of Americans reflects an increase in demand, higher income in the business sector, the growth of stock prices. This is the main indicator of future spending and the business cycle.
Industrial Production - Industrial production, a monthly index reflecting the increase rate of industrial production. It reflects the strength of the national currency and stock market. With the growth of this index, there is a growth in stock markets. As the stock prices decrease, they fall.
Durable Goods Orders - report on orders for durable goods. Usually, these are expensive goods (cars, home appliances, jewelry), so this indicator shows not only the expectations of consumers but also their ability to spend large sums of money. An increase in this indicator means an increase in production and economy, which means - strengthens the stock market, while a decrease - weakens it.
Each indicator can affect more than its market. For instance, if a government issued a statement that more building permits were given, it will result in more jobs, lowering the unemployment rate and thus leading to higher consumption rates and ending with a strengthening of the local currency.
Attributes of Economic Indicators
Economic indicators have three main attributes - relation to the business cycle or an economy, frequency of data, and timing.
Concerning the business cycle or economy, indicators have one of three distinct economic connections like procyclic, countercyclical, and acyclic.
The procyclic economic indicator goes in the same direction as an economy. It means that when the economy is strong, this number progresses. For instance, gross domestic product (GDP).
The countercyclical economic indicator goes on the contrary direction of the economy, e.g. the unemployment rate increases as the economy gets worse.
The acyclic economic indicator has nothing to do with the economy’s well-being, e.g. some sports events.
In the frequency of data, most countries publish quarterly GDP numbers and monthly unemployment rates. Indicators like the Dow Jones Index is instantly accessible and changes every second.
In timing, indicators of the economy can be leading, lagging, or coincident. It shows the timing of changes in indicators regarding economic changes.
In leading one, indicators change before economic changes. Stock market returns are a leading indicator that drop before the economy declines and grows before the economy starts to recover.
The lagged indicator doesn’t reverse direction until a few quarters later changes in the economy. It can be understood by the example of the unemployment rate which grows after 2 or 3 quarters following an economic development.
The coincident one occurs in real-time and clarifies the state of the economy.
The Importance of Economic Indicators
The code to the success for most traders is a constantly refreshed economic calendar. The calendar comprises all significant events and publishes those that influence the forex markets as well as the economy of a particular country. An inclusive perception of why markets do what they do can be found on these calendars, while traders can predict market movements based on past, present and foreseen figures. With the release of fundamental economic data, such as CPI, GDP, etc., figures perform great trading opportunities.
How to use Economic Indicators?
To employ the indicators to one’s success, a decent market review is a must. Some traders favor more fundamental analysis while others prefer a very precise analysis. For all traders, the indicators can be a valuable mean demanding thorough monitoring of the economic calendar.
Once the trader knows that a specific event is scheduled to happen, e.g. a country’s consumer supply and demand rate, he will get ready by making a speculation on the figure that will be published. In accordance with that speculation, the trader will decide which asset to trade and in what direction. If the trader is defined, the positions will result in abundant returns. Trading on Economic Indicators should be performed with an understanding of appropriate markets and financial circumstances, or global events that may influence the content of the indicator. Once informed of all the relevant aspects, the trading will be executed according to a solid basis of clearheaded thinking.
Any trader should get acquainted himself with the economic calendar and master which events are connected to the chosen assets. Once this awareness is obtained, traders will boost their trading becoming more prosperous with the returns surpassing all the expectations.