7 Key Economic Indicators Every Forex Trader Should Know
Economic factors like interest rates, inflation, employment rates, consumer spending and manufacturing activity are all indicators of the economic health of a country or a region which ultimately determines the strength and value of its currency.
That's why experienced traders follow these indicators and use them as one of the pillars of their forex trading strategies.
This article will present seven of the most important economic indicators every trader should know. Following these indicators is straightforward, as many online brokers have a market news section with information on these.
You will see that some of these indicators are focused on the US and European economies, which have a huge influence on the global forex market, while others are relevant to all economies and currencies.
Following and understanding these indicators will help improve your economic knowledge and upgrade your trading activity.
1. Central bank interest rate decisions
One of the major drivers of the global currency market is central bank monetary decisions and more specifically interest rate decisions.
Interest rate decisions can directly affect the demand and supply of a currency. Higher interest rates usually attract foreign investors and this increases the demand for the country's currency and in turn increases its value. On the other hand, lower interest rates usually decrease foreign investments and decrease the currency's value.
This strong correlation is the reason forex traders keep a close eye on interest rates decisions, particularly those of the central banks of the two most important economies in the world – the U.S. Federal Reserve and the European Central Bank (ECB).
The US Federal Open Markets Committee (FOMC), meets eight times a year to determine US monetary policy. The FOMC decisions and announcements tend to directly impact the global currencies market because the USD is the world's reserve currency, and the change in its value has a cascading effect on other currencies.
Similarly, the ECB Governing Council’s monetary policy meetings take place every six weeks. Its decisions affect the global markets, in addition to influencing buying and selling activity on European indices, stocks, and other assets.
2. Unemployment Rate
The unemployment rate (defined as the percentage of the labor force actively looking for work) is closely tied to consumer spending levels – one of the main factors of economic growth. Since this is one of the key metrics followed by central banks, forex traders use this indicator to try and predict any actions the banks may take to stimulate the economy (such as the raising or lowering of interest rates) that ultimately affect a country's money supply and its currency's value.
3. Nonfarm Payrolls (NFP)
Non-farm payrolls (NFP) is a report compiled by the US Bureau of Labor Statistics (BLS) that sums up the number of jobs added in the United States, excluding farm, government, household and non-profit organizations employees. Some analysts consider this figure to be a proxy for the US Gross Domestic Product (GDP) because it provides an indication of future spending, which is a prime factor in assessing economic growth.
While many traders consider GDP to be highly significant, the fact that the GDP data is released every quarter categorizes it as a lagging indicator. “Non-farm payrolls” is more up-to-date while providing a clue as to the condition of the economy moving forward.
4. Consumer Confidence Index
The Consumer Confidence Index measures consumers perception and sentiment regarding their expected financial situation in the US. It is measured by The Consumer Confidence Index Report compiled monthly by The Conference Board, and The Consumer Sentiment Index compiled by The University of Michigan.
Since consumer spending is one of the main drivers of growth, these reports provide some indication of the direction that the economy might take, because positive consumer sentiment usually leads to increased spending and an upturn for the economy.
5. Consumer Price Index (CPI)
The Consumer Price Index (CPI) presents an index-linked measure of the cost of goods and services, providing an indication of how prices are moving. The CPI report tends to have a high impact on the value of a country's currency because inflation figures often directly affect monetary policy decisions made by central bankers, especially interest rates decisions.
6. Industrial Production Index
The Industrial Production Index is a monthly report compiled by the US Federal Reserve which measures the level of US output in the manufacturing, mining, gas and electric utilities industries.
Many traders consider this report to be important because it gives indications of overall structural changes in the US economy. Since the correlation between this index and economic activity is very close, some traders use this information as an early signal for changes in GDP (Gross Domestic Product).
7. Advance Monthly Sales for Retail Trade
Commonly referred to as The Retail Sales Report, this monthly report released by the US Census Bureau gives an early estimate of the nominal dollar value of sales within the US retail sector, in addition to revealing any trends by reporting changes from previous periods.
Forex traders generally look at changes in retail sales as indications of the direction of the economy, because personal consumption reflects overall sentiment and is considered to be a primary factor of economic growth.
The Bottom Line
The forex market is driven by economic factors that impact the value and strength of currencies, with a special focus on the US economy and the USD. That's why following the key indicators in this article is key for any forex trading activity.
