Forex trading involves fundamental analysis in determining how economic reports can drive currency price action. The level of an economy’s growth can help determine the currency’s value as it dictates whether supply or demand will rise. With that, forex traders keep close tabs on economic releases to gauge potential currency strength.
Strong or better than expected economic reports typically boost a currency’s value because it indicates that the country is doing well and that demand for its assets is high. It could also be an indicator of interest rate hikes or higher returns for the country’s securities, later on. Conversely, weak or worse than expected economic reports usually dampen a currency’s value because it reflects poor performance of the country and low demand for its assets. It could also be a hint of future interest rate cuts or lower returns for the country’s securities down the line.
Important Economic Reports in Forex
The most closely watched among the economic reports is the GDP report. This figure, which is the sum of all products and services in the local economy, is considered the most concise indicator of economic performance. The GDP is usually reported in percentage terms relative to the economy’s performance in the previous period so it reflects growth or contraction in the economy. In addition, since the GDP is released quarterly, it tends to have a huge impact on the relevant currency.
Next, the consumer spending or retail sales release is another one of the most important economic reports for forex traders. Aside from showing how much consumer spending will be able to contribute to overall economic growth, stronger than expected retail sales means that manufacturers and producers will have to pick up activity and hiring in order to cater to the rise in demand. On the other hand, weaker than expected retail sales data means that the manufacturing and production industries will have to reduce their activity and hiring as demand wanes.
Last but not least, the inflation or CPI report is also a high-impact economic report. This is usually treated as an indicator of whether the country’s central bank has room to ease or not. Low inflation figures means that the central bank will be able to loosen monetary policy or cut interest rates without damaging the economy, which means that there could be lower returns on the currency. This will drag the currency’s value down. Conversely, high inflation figures mean that the central bank has room to tighten monetary policy or increase interest rates, which translates to higher returns on the country’s currency, therefore boosting its value.
To contact the reporter of the story: Jonathan Millet at john@forexminute.com
