8 Leading Economic Indicators that Affect the Forex Market
One of the key tools used by successful forex traders worldwide is the economic calendar. This is what tells them when to expect economic announcements that can have a significant impact on forex prices across the globe. Whether in the form of hard data, reports or survey results, economic information released by government and non-government bodies form very useful economic indicators.
There are three main types of indicators – leading, lagging and coincident. Leading indicators help in gaining insights about future market activity, while lagging indicators deal with events that have already occurred. Coincident indicators focus on the current state of the economy.
All three types of indicators affect the currency market in a variety of ways. However, given the plethora of economic information released by every single country, how do you decide which indicators to follow?
Here’s a look at eight economic indicators that have the highest impact on the forex market.
1. Gross Domestic Product (GDP)
GDP is the most important measure of the overall health of an economy. The compilation process for GDP takes such a long time 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 some surprises in store, they can have a large impact on the market.
So, despite its lack of timeliness, GDP figures help us understand where we currently are in the business cycle.
2. Non-Farm Payroll
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 every month. The reason this report has such a significant impact on forex prices is that historically, the NFP employment data is closely correlated to the GDP and, therefore, can be used as a timely indicator of the US GDP. In addition, this report affects the nation’s monetary policy, given that stable prices and maximum employment are two of the Three Monetary Objectives of the Federal Reserve.
3. Federal Funds Rate
Another US-based indicator, this one is released by the Federal Open Markets Committee (FOMC), a committee in the Federal Reserve System. Its responsibilities include making key 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 determine the US monetary policy. The outcomes of these meetings can directly impact the forex market. Statements that are released after each meeting serve as a guide for the Federal Reserve regarding the future course of its monetary policy.
If the FED changes the Federal Funds Rate or the perception regarding its direction of monetary policy, it affects the US dollar. And, since the USD is the reserve currency of the world, this has a cascading effect on other currencies.
4. Consumer Price Index
Also known as CPI, this is a measure of the goods and services and is index-linked to a base starting point. It gives us an idea about how quickly prices are rising or falling. This information is important, since 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 the forex markets. Again, it is the deviation from the predicted results that usually has the greatest impact.
For instance, if the value of CPI is much higher than expected, it signals that going forward, monetary policy will be tightened. All other things being equal, this can be bullish for the US dollar.
5. Retail Sales Report
The Advance Monthly Sales for Retail Trade, known simply as Retail Sales, is two weeks into each month by the US Census Bureau (a division of the US Department of Commerce) at 08:30 ET. This report gives 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 contents of the report. If there is a large divergence between 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 the Personal Consumption Expenditures (PCE). PCE is considered a major contributor to the growth of the American economy.
6. Unemployment Rate
In simple terms, the unemployment rate can be defined as the percentage of labour force involved in an active search for jobs. During periods of recovery, unemployment data acts as a lagging indicator. Unemployment is also closely linked to consumer sentiment. An extended period of unemployment is extremely destructive for consumer sentiment, since it affects consumer spending and overall economic growth.
Other things being equal, a weakening US labour market is usually considered bearish for the US dollar.
7. Capacity Utilisation
This indicator helps to analyse the performance of the US manufacturing sector, taken as a proportion of its full capacity. Factors such as normal downtime are also considered. The indicator value is calculated as a ratio of the industrial production index to an index of full capacity.
Capacity utilisation usually reflects the health of the manufacturing sector. It also sheds some light on the possible trends that are likely to emerge in the future, along with clues about inflation.
History shows that rates below 78% point to an upcoming recession. It can 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), as compared to a base year, in three broad categories – mining, manufacturing and gas/electric utilities. The US Fed compiles the data and creates this report, which is published by mid-month, each month. Some part of the index data is from hard data (directly from industries or official surveys), but this may not be available every month.
There are various other key economic indicators that are worth following, such as inflation rate, durable goods orders, initial jobless claims, Consumer Confidence Index, central bank policy statements and sentiment surveys. So, make sure you have an economic calendar handy to keep track of upcoming announcements and reports.
