The 10 essential economic indicators you should look out for and work with in forex market are:
1. Trade Balance
2. Gross Domestic Product(GDP)
3. Consumer Price Index(CPI)
4. Producer Price Index(PPI)
5. Payroll Employment
6. Durable Goods Orders
7. Retail Sales
8. Housing Starts
9. Inflation Rates
10. Interest Rate
1. INTEREST RATES:
Interest rates rule the forex market. Currencies representing economies with higher interest rates tend to be stronger than currencies representing economies with lower interest rates.
Investors are always looking for the greatest return on their investments, and economies with higher interest rates usually have higher yields on their investments.
If you can get a 6 percent return on your investments in the United Kingdom, but you can only get a 2 percent return on your investments in Switzerland, you are most likely going to invest in the United Kingdom.
As more and more people put their money in investments in the United Kingdom, demand for British pounds (GBP) increases. Basic economics tells us that as demand increases, the value of the British pounds (GBP) also increases.
2. INFLATION RATES:
Successful forex investors always watch central banks to see what they are going to do with interest rates. Successful forex investors also watch the economic numbers that central banks watch when making their interest rate decisions so they can more accurately determine what central banks might do.
One extremely important economic indicator central banks watch when making their interest rate decisions is inflation. Inflation is a general rise in price for goods and services.
Moderate inflation is generally accepted as a natural by-product of economic growth. Too much inflation, however, can hurt an economy.
Central banks are always on the lookout for rising inflation. When they see inflation rising to uncomfortable levels, they do whatever they can to curb that growth.
You, as a forex investor, have to watch inflation rates to get a glimpse into what central banks may do with their interest rates. If inflation is rising, central banks will most likely raise interest rates, which is good for the representing currency of that economy.
3. HOUSING STARTS:
It is a measure of the number of residential units on which construction is begun each month and the level of housing starts is widely followed as an indicator of residential construction activity.
The indicator is followed to assess the commitment of builders to new construction activity.
High construction activity is usually associated with increased economic activity and confidence, and is therefore considered a harbinger of higher short-term interest rates that can be supportive of the involved currency at least in the short trem.
4. RETAIL SALES:
Is a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending.
Rising Retail Sales are often associated with a strong economy and therefore an expectation of higher short-term interest rates that are often supportive to a currency at least in the short term.
5. DURABLE GOODS ORDERS:
These are measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory goods.
Monthly percent changes reflect the rate of change of such orders. Levels of changes in durable goods order are widely followed as an indicator of factory sector momentum.
Durable goods orders are measured in norminal terms and therefore include the effects of inflation.
Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates that are often supportive to a currency at least in the short term.
6. PAYROLL EMPLOYMENT:
This is a measure of the number of people being paid as employees by non farm business establishments and units of governments.
Monthly changes on payroll employment reflects the net number of new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity.
Large increases in payroll employment are seen as signs of strong economic activity that could eventually lead to higher interest rates that are supportive of the currency.
If, however, inflationary pressures are seen as building, this may undermine the longer term confidence in the currency.
7. PRODUCER PRICE INDEX(PPI):
It is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers.
The monthly PPI reports are widely followed as an indication of commodity inflation.
The PPI is considered important because it accounts for price changes through out the manufacturing sector.
A rising PPI is normally expected to lead to higher consumer price inflation and thereby to potentially higher short term interest rates.
Higher rates will often have a short term positive impact on a currency, although significant inflationary pressure will often lead to an undermining of the confidence in the currency involved.
8. CONSUMER PRICE INDEX(CPI):
The CPI is a measure of the average level of prices of a fixed basket of goods and services purchased by consumers.
The monthly reported changes in CPI are widely followed as an inflation indicator.
The CPI is a primary inflation indicator because consumer spending accounts for nearly two-thirds of economic activity.
Often, the CPI is followed but excludes the price of food and energy as these items are generally much more volatile than the rest of the CPI and can obscure the more important underlying trend.
Rising consumer price inflation is normally associated with the expectation of higher short term interest rates and may therefore be supportive for a currency in the short term.
Nevertheless, a longer term inflation problem will eventually undermine confidence in the currency and weakness will follow.
9. GROSS DOMESTIC PRODUCT(GDP):
This is the broadest measure of aggregate economic activity available. Reported quarterly, GDP growth is widely followed as the primary indicator of the strength of economic activity.
GDP represents the total value of a Country's production during the period and consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners and the government.
As GDP reports are often subject to substantial quarter to quarter volatility and revisions, it is preferable to follow the indicator on a year to year basis.
It can be valuable to follow the trend rate growth in each of the major categories of GDP to determine the strengths and weaknesses in the economy.
A high GDP figure is often associated with the expectations of higher interest rates which is frequently positive, at least in the short term for the currency involved, unless expectations of increased inflation pressure is concurrently undermining confidence in the currency.
10. TRADE BALANCE:
It is a measure of the difference between imports and exports of tangible goods and services. The level of the trade balance and changes in exports and imports are widely followed by foreign exchange markets.
Measures of imports and exports are important indicators of overall economic activity in the economy. It is often of interest to examine the trend growth rates for exports and imports separately.
Trends in export activities reflect the competitive position of the Country in question, but also the strength of economic activity abroad. Trends in import activity reflect the strength of domestic economic activity.
Typically, a nation that runs a substantial trade balance deficit has a weak currency due to the continued commercial selling of the currency. This can, however, be offset by financial investment flows for extended period of time.
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Good luck!.
