In any fundamental analysis, the scheduled release of economic indicators plays an important role. For any given month, hundreds of different economic indicators that affect foreign currency pairs are published. Most of these indicators have minimal impact on the forex price action while massive volatilities accompany others. When on the right side of a high impact fundamental economic indicator release, a forex trader might be collecting a lot of pips, provided their trading strategy and risk management measures are tested and adapted to their trading style. So, how can one identify the best fundamental economic indicators to trade in forex?
First, you need to get acquainted with an economic calendar, which will help you keep track of the fundamental indicators’ scheduled release. Furthermore, the economic calendars show the past reading of the hands and the analysts’ expectations. These two components help determine whether the published data will positively or negatively impact the relevant currency pairs.
This article will cover a few economic indicators and illustrate the impact they have on the forex market. Note that this should only serve as a guide to help you identify and analyze more economic indicators.
Gross Domestic Product (GDP)
In an economy, GDP shows the totality of the value of goods and services produced over a particular period. An increase or decrease in the GDP can gauge whether the economy has expanded or contracted. An expanding economy implies that unemployment levels declined, and the welfare of households improved. Conversely, a contracting economy means more jobs were lost, and some families are worse off.
For most countries, the GDP data covers quarterly periods. Let’s look at the Australian Q2 GDP released on September 2, 2020, at 1.30 AM GMT. The Q2 GDP data was -7.0% worse than analysts’ expectations of -6.0%.
The AUD/USD pair dropped 21 pips upon the release of the negative Australian GDP.
Employment Report: Forex Fundamental Indicators
This data shows the prevailing state of the labor market in an economy. While the report contains several data such as the number of jobs in different sectors of the economy, the demographics of the employment trends, and how long it takes for job seekers to find employment, the most significant aspect of the employment report is the national unemployment rate.
A lower national unemployment rate shows significant economic growth and a potential increase in aggregate demand and supply. On the other hand, a constant rise in the national unemployment rate could signal that the economy is contracting since increasing unemployment levels indicate either more businesses are scaling down or ceasing operations. The national unemployment levels could be used to forecast impending recessions.
The unemployment data monthly for the previous month. Let’s look at the August unemployment data release on September 17, 2020, at 1.30 AM GMT. The national unemployment rate in August was 6.8%, better than the expected 7.7%.
The AUD/USD pair gained 29 pips in 5 minutes upon releasing the better than expected unemployment data.
Inflation Data: Forex Fundamental Indicators
The overall increase in the price can serve as an indicator of the money supply in an economy. The inflation from the consumer’s perspective as the Consumer Price Index (CPI) or the producers’ attitude regarding the Producer Price Index (PPI).
A continuous increase in the inflation rate could indicate that the economy is rapidly expanding at unsustainable rates, and it could be overheating. Conversely, continually dropping inflation rates could mean that the economy is stagnating and might be for a recession.
The inflation data appears monthly for the preceding month. On September 11, 2020, at 12.30 PM GMT, the U.S Bureau of Labor Statistics published the August CPI data. The core CPI had increased by 0.4% in August, better than analysts’ expectations of a 0.2% increase.
The EUR/USD pair dropped 16 pips for 15 minutes after releasing the better than expected US CPI data.
Central Bank Interest Rates
The interest rate data published by the central banks is arguably the most significant economic indicator in the forex market. Here are some of the reasons why the interest rate is essential.
Firstly, interest rates determine the cost of borrowing money. Consequently, this determines the supply of money in an economy along with its velocity. This interest rate aspect is what central banks rely upon while targeting to control the rate of inflation in the economy.
Secondly, interest rates can adjust the lucrativeness of investing within an economy relative to other countries. By increasing interest rates, investors will also get higher returns when they invest in the country. The higher interest rate attracts foreign investments and encourages citizens to save more rather than consumption—this aspect of interest rate correlates to the U.S. 30 and US 500.
Finally, when forex traders monitor the economic indicators, their main goal is to anticipate whether the central banks will hike or cut the interest rates. When inflation is continuously rising, traders can expect that the central banks might hike the interest rates to mop up excess money in the economy and prevent the economy from overheating. In another scenario, when the unemployment rate is increasing, interest rates raise. Lowering the interest rates stimulates demand, which inadvertently leads to economic growth and lower unemployment rates.
On November 13, 2019, at 1.00 AM GMT, the Reserve Bank of New Zealand announced a surprise interest rate hike from 0.75% to 1.00%.
The NZD/USD pair gained 80 pips for 15 minutes after releasing the interest rate by the RBNZ.
However, note that the central banks do not often adjust the interest rate. So, when intending to trade the interest rate decision, pay close attention to the accompanying monetary policy statement as it may provide invaluable insights into whether the monetary policy committee is dovish or hawkish.
Forex Fundamental Indicators Bottom Line
The above analyses are merely a handful of the several economic indicators daily. You should conduct further studies using different hands with different currency pairs to establish which ones you are comfortable trading. Cheers!