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Economic indicators that affect the forex market

Economic indicators can have a noticeable effect on Forex and CFD  prices. Accordingly, several traders keep a sharp eye on the economic calendar, to ensure that they are alongside any potential volatility bumps that lie in the road ahead.

The list of economic indicators that impact the forex market

Gross Domestic Product (GDP)

GDP is the largest measure of the general health of an economy. It takes such a long time to gather that its direct effect on FX and CFD prices is frequently muted .. and by the time the data is published, many of the components are already known, and, therefore, predictions are often fairly true. 

Despite its lack of timeliness, it is still a very significant indicator to understand because it is the single best measure used to confirm where we stand in the business cycle.

The business cycle is the main concept in modern economics. It includes an expansionary phase, whereby many areas of the economy grow at the same time, and a recessionary phase when economic activity contracts. Because the broadest measure of economic activity is GDP..economists tend to decide where we are in the business cycle by looking at alternations of growth and contraction in GDP.

The technical definition of a recession is 2 consecutive quarters of contraction in GDP. A recession ends as soon as we see a quarter of growth. Politicians, policymakers, and economic analysts focus on this indicator, precisely because it is such a comprehensive measure. Investment banks adopting a top-down approach to Forex analysis will start by making projections for the general economic climate. GDP is an important part of this kind of analysis of foreign exchange market macroeconomics.

As pro traders, we need to be aware of it as well, but you should also be cognizant of the fact that because GDP is a lagging indicator..its basic use is to confirm what we already predict. Its lack of timeliness means that its utility as a trading tool for short and medium-term trading is limited. 

Nonfarm Payrolls (NFP)

Why does it have such a big effect on market prices?

Part of the answer lies in the timeliness of the report. The employment cycle and the business cycle are closely related and “historically” changes in nonfarm payrolls (NFPs) have moved along a very similar path to quarterly GDP changes. This close association means that payroll data can be used as a proxy for GDP.

The main difference between the two is that.. nonfarm payrolls come out monthly, reporting on the month that ended just a few days before. In reverse, GDP is reported quarterly, and with a big delay.

Another part of the answer is the effect the report has on monetary policy. Maximum employment and stable prices are two of the FED’s Three Monetary Objectives. It follows then that employment data can affect market perceptions of the future direction of monetary policy.

Unemployment Rate

Is the percentage of the labor force actively searching for work. In times of recovery, unemployment works as a lagging indicator. Unemployment is also closely tied to consumer sentiment. Extended times of unemployment are very damaging to consumer sentiment, and also affect consumer spending and affect on economic growth.

Unemployment data gives CFD traders insights into one of the key metrics followed by the FED. This means that any strong divergence from predictions has a big effect on FX and stock markets. 

Federal Funds Rate

The Fed open markets committee (FOMC) meets 8 times a year as part of its regular schedule to determine US monetary policy. and The result of an FOMC meeting can affect the fx market..should there be any contrast from the expected course. The main base that drives FX rates is the level of interest rates in the 2 countries involved, and the predictions regarding those interest rates.

If the FED makes a change to the federal funds rate or perceptions about the future course of monetary policy.. it contrasts with every month.

To fill the gaps..the FED evaluates using proxies, such as hours worked from the Employment Situation report, or The amount of power used in the month by the industry in question. The full process for calculating the index is.. set out in the best place to look for a full rundown of the methodology involved – the FED’s own ‘Explanatory Pages’. 

For example

the preliminary release of the industrial production index for September 2019 came in at 109.52. This is an expression of the current output relative to the base year. At the time of writing, the FED used 2012 as its base period. The September 2019 level of 109.52 signifies, therefore, that production levels were 9.52% higher than the average level in the base period of 2012. Manufacturing only makes up roughly 20% of the US economy but is closely monitored by FX and CFD traders.

in the end

The industrial sector is important because ... along with the construction sector, it is responsible for the majority of the change in US output seen in the business cycle, and can give insights into the development of structural economic changes. The Industrial Production Index is procyclical. This means there is an agreement between its movements and the changes in the business cycle. The correlation between this index and economic activity is close enough for some analysts to use this report as an early signal for how GDP might be performing.

Retail Sales

This is more popular as Advance Monthly Sales for Retail Trade, to give the report its full name. It is better known by Forex traders simply as retail sales. The Census Bureau, which is a division of the U.S. Department of Commerce, releases the report roughly 2 weeks after the month in question, at 08.30 ET. The report gives an early evaluation of the nominal dollar value of sales within the retail sector and it also reports the number as a percentage change from the previous month.

Normally, it is this figure that CFD and Forex traders respond to. It is a closely followed report and has the potential to send perturbations through market prices, especially if there is a big divergence between the reported figure, and Wall Street expectations. Why is it such a closely followed report? It’s all about personal consumption expenditures (PCE). PCE is a major contributor to the growth of the US economy. It’s also worth comparing with the Personal Income And Outlays report from the Bureau of Economic Analysis (BEA).


This specifically includes a PCE component, which then feeds directly into GDP calculations. The data covered in that report is more extensive than the retail sales report. Retail sales data comes out a fine couple of weeks earlier..thus providing more timely insight into effectively the same area of the economy. If retail sales are growing, it is an indication of economic health, and it tends to have a bullish effect on the stock market.

Powerful sales data may lead to rising prices, however, meaning that there are inflationary considerations to be taken into account. This aims to have a positive effect on the US Dollar but is bearish for bond prices. Conversely, weakness in the retail sales report tends to depress the stock market, is bearish on the US Dollar, but bullish for bond prices.

Certain components of the report may contribute to unwanted volatility from an analysis perspective. Motor vehicles, because of the expense of such items, tend not to be evenly distributed month to month. Accordingly, analysts often focus on retail sales, excluding auto sales to remove unpredictable variations, and to perceive underlying trends in the data more easily. What is the perfect time of day to trade forex?!

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