As a forex trader, you need to always be on the lookout for new information and data that can potentially impact the market. Sounds difficult, we know. But that is exactly the mark between a trader who is only okay and a trader who is exceptional and makes the real bucks.
Apart from things you can directly do with the price data that you have available in front of you on the chart, such as technical analysis and chart analysis, there is also fundamental analysis.
In fundamental analysis of financial markets, including the foreign exchange market, we take a look at the bigger picture. We consider macro factors, whose impact might not be exactly direct on the forex market, but nonetheless they have a latent and potent impact coming the way of forex.
Of course, fundamental analysis is a wide and extensive field of analysis. In this article, we are going to be focusing on a rather important facet of this type of analysis; i.e. economic indicators. In fact, we are going to go through the top 10 most important economic indicators that can in one way or another impact the forex market.
1-Consumer Price Index or CPI
One of the most important economic indicators in any country and economy is the consumer price index, which is popularly known as inflation. Some of the indicators that we have listed might have a more indirect contact with the forex market, but CPI has as direct an approach as possible among these factors.
Of course, inflation can be defined as the general increase in the price of products and services over a given period of time. High figures for inflation are naturally the sign of an economy in deep problems. At the same time too low figures are also an early indicator of recession.
One of the economic indicators that many might not give much attention to is consumer spending. Amazingly, in many great economies, consumer spending can account for the majority of that economy’s GDP. This is why consumer spending is an extremely important indicator. Proper consumer spending rates can be the green light any economy needs.
3-Gross Domestic Product or GDP
Standing a head and shoulder higher than all the other economic indicators is the gross domestic product, otherwise known as GDP. Perhaps the reason why GDP is such an important economic indicator in all aspects, including for the forex market, is the fact that in calculating an economy’s GDP, a great number of factors are taken into account. So the result, being an economy’s GDP, provides a lot of valuable data.
In fact, since GDP is the most important indicator for the health and strength of any economy, when GDP data are announced, forex traders should be ready to absorb the impact or ride the wave that results from this important economic news.
Though ordinarily unemployment rates are considered on their own, it might be a good idea to also include employment rates to them. In any case, rates of unemployment and employment can provide information about the health of any economy. By simple glance at such rates, you can tell whether the economy is doing alright or not. The way unemployment rates can impact the economy and the forex market by extension is the impact these figures can have on the GDP and also various consumer indices, such as consumer confidence index.
Trade deficit can be defined in terms of the difference between an economy exports to its imports. Being one of the most important and impactful economic indicators, forex traders should also pay attention to it. The way trade deficit can ultimately impact exchange prices on the forex is through the strength or weakness that it can bring for the economy. One of the reasons the US dollar has been able to assert its dominance on the world economic stage is the positive trade deficit of the United States. With more than 2 trillion dollars in exports recorded only in 2022, the United States has been able to hold a positive trade deficit for as long as we can go back. Of course if things were upside down, the US dollar would not be so strong in foreign exchange markets.
6-Consumer Confidence Index or CCI
On our list so far and altogether, this is the third consumer based index for the economy after consumer price index and consumer spending. It is worth mentioning that there are so many more consumer based indices that we have not listed. Though we have picked the most important to the forex market.
As the name suggests, the CCI is an indication of how reassured consumers are with regard to their own economy. A higher CCI means consumers are more willing to spend in the economy which will lead to booming businesses and lower employment rates. All of which can impact the exchange value of that economy’s fiat currency.
When we are talking about interest rates they are directly related to the money lent by central banks to other financial institutions and even the administration, and less so to the loans taken out by individuals from commercial banks. This is why in the US for instance they are referred to as more appropriately federal interest rates. Of course, interest rates in any country are directly impactful on that country’s currency, but because of the dominance that the US dollar has in foreign exchange markets, forex traders follow the news about interest rates announcements by the US federal reserve more than other countries’ central banks.
8-Industrial Production Index or IPI
This economic indicator measures how much industries in all sectors of an economy are producing. In other words, the industrial production index measures the net output of the industries within an economy. This index has a direct impact on various other economic indicators including GDP, trade deficit, and even consumer spending.
This indicator is similar to the IPI discussed above. But manufacturing demand directly measures the demand in the market for the goods and services produced by industries. The way manufacturing demand is calculated is by reviewing the supply chain, shipments, and inventories of manufacturing entities in the economy.
10-Home and Real Estate Sales
When we talk about consumer spending as one of the most important economic indicators, though it includes all types of expenditure made by consumers, more significant spending such as on real estate is naturally more important.
Home and real estate sales make up a great portion of all the spending done by consumers. Although real estate is conventionally a strong and sturdy market, it can just as well indicate the health and wellbeing of an economy.
If we take a look at the years leading up to the 2008 global economic recession, we can see how the booming real estate industry came to a crashing halt and took down the economy with it.
So gauging an economy against the home sales in that economy is a recommended and straightforward means of gauging the health of any economy.