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No investment or trading decision should be made without proper market analysis - that’s a fact. But, what does a proper analysis look like, and how can you do one? This is a very important, yet hard question to answer.
First of all, different traders will tell you different things to focus on during market analysis. Some will tell you to focus on the charts and analyze them to the last detail. Others will tell you to stay in touch with the ongoing events around the world to make perfect decisions.
Then, there are traders who will tell you to focus on everything, which can be quite a hard thing to do, especially when you are a beginner.
In this guide, we are going to focus on the fundamental side of market analyses and discover the most important economic indicators that traders should keep an eye on. All of these economic indicators can have dramatic effects on Forex price movements, and understanding these effects can be pivotal for making it in this market.
When trading Forex, individuals have to focus on market analysis. As we have already mentioned, some traders are using either technical or fundamental analysis, while others use a combination of these two.
Fundamental analysis is the process of analyzing ongoing events around the world, to determine how they could impact the price movements in the currency exchange market.
For fundamental analysis, traders are using economic indicators. These are things such as inflation rates, gross domestic product, unemployment statistics, and many others, that could potentially alter the price movements in the market.
“Never, ever argue with your trading system” - Michael Covel
The statements made by central banks around the world are also very frequently analyzed for understanding how the prices could change. Many traders are using Forex calendars to ensure they don’t miss out on important events taking place in the market.
Forex calendars are tools that include all the important information about the developments in the Forex trading market that should be taken into consideration. It includes the dates of central bank reports, as well as economic growth data release dates among many others.
Now that we have a general idea of what economic indicators are, we can directly get to the point and discover the most useful economic indicators that Forex traders should keep an eye on.
After rigorous research and analyses, we were able to find the top 8 economic indicators that every single trader should know about. So, without further ado, let’s get into it and discuss each of these indicators one by one.
When it comes to Forex trading market analyses, one of the most important economic indicators that every trader should keep in mind is inflation. It is one of the most pivotal long-term economic indicators that can impact the price fluctuations of currency pairs a lot.
To put it in the most simple terms, inflation is a rate of decreasing purchasing power for a specific currency. The inflation rate is different for every country around the world, and central banks are responsible for maintaining a stable inflation rate. While high inflation is certainly bad for the economy, neither is it good to have the inflation rate too low.
In general, if you see that country X’s inflation is too high, it means that the purchasing power of X’s national currency is decreasing, which can be a sign that the exchange rate of the currency might be dropping too.
When a country has very high inflation, it means that the cost of goods is increasing rapidly. This can be a sign of fewer foreign customers and lower demand for the currency, which, in turn, can disrupt the value of the currency.
Gross domestic product (GDP) is known as one of the key economic indicators. It is the dollar value of the goods and services produced in the country. In most cases, GDP is calculated over a year.
Many experts also view GDP as the general size of the whole economy of a certain country. As a result, it can be said that changes in GDP can be a sign of changes in economic growth. This can have a direct effect on the country's currency exchange rate.
When the GDP reports are published, they are usually compared to those of the previous year. It can be used by traders to determine the size of the changes in a specific country's economy. In most cases, GDP reports include nominal and real values. Nominal GDP is the standard value, while real GDP is adjusted according to the price changes over the year.
Another very important economic indicator for Forex traders is the performance of the country's stock market. As we have already talked about above, GDP can be quite a useful indicator for Forex traders.
However, it is only available for traders once per year. On the other hand, the performance of the stock market can be analyzed by traders throughout the year. This performance can have an impact on the GDP and traders can predict the possible GDP prior to it being published.
As a result, it can be used by individuals to their own advantage and can be used as a way to make correct judgments for future price movements in the Forex trading market.
When discussing the most important economic indicators that affect the Forex market, nonfarm payroll should not be forgotten. Also known as NFP, it is published by the US Department of Labor on a monthly basis.
This data is published on the first Friday morning of every new month and can have quite a big impact on the market. This report includes information about the employment statistics in the country compared to the month prior. For example, if the data was released in August, it will include information about July.
While the actual headline payroll number is considered to be the most crucial part of this report, many traders also frequently look at other numbers provided in the report. Apart from employment data, it also includes changes in wages and different types of revisions and adjustments from the past month's data. When the report contains major differences from the general expectations in the market, it can have a major impact on the Forex trading market.
Producer Price Index, aka PPI, is a very important bit of economic data that is published during the second week of every month. This data is published by the Bureau of Labor Statistics.
PPI can be used by traders to determine the possible direction inflation could take, which can be used to forecast the impact on the Forex market. This report focuses on measuring the changes in the price of finished goods and services sold by producers. It can be viewed as a monthly change in the average price of the basket of goods.
Since it can be used to determine the possible direction of inflation, it can be a very useful economic indicator for Forex traders. Usually, its release comes with significant price movements in the FX market.
While it is certainly not the most important indicator used by FX traders, it does have enough effect on the Forex trading market that it should not be disregarded by individual traders.
Central banks are major players in the Forex trading market as they set different types of goals as well as general financial strategies for their respective countries. One key goal that central banks set is the interest rate.
Every single country around the world sets different types of key interest rates, but all of them work in the same way. The interest rate is the rate at which commercial banks get their loans from the central bank.
But, why would Forex traders think about interest rates at all? Simply put, as interest rates go up, the interest of investors in the country's currency also tends to increase. But, the thing about interest rates is that they don't move that often, which might make it hard for Forex retail traders to use interest rates as indicators for trading.
One of the most important things that traders should keep in mind when trading Forex is the conditions of the country's annual budget. For example, if you see that the budget is mostly made up of loans, it can be a sign that the economy of the country is not doing that good, which can cause the price of the national currency to fall.
The budget surplus/deficit data can be one of the most useful indicators for retail traders when trading currency pairs.
For example, looking at the short-term impact, if the budget deficit is increasing and the spending stimulus is high, the yields can increase as well. This can be quite beneficial for the currency in the short term. If you look at the bigger picture, this can have a different impact, causing the economy of the country to perform poorly.
The last economic indicator that we are going to discuss today is global events. What makes this indicator so important is that ongoing events around the world can have a dramatic effect on currency pairs and their prices.
This can be anything from geological events to wars, or even a pandemic. Such events can have quite a devastating impact on the economies around the world, which can send the currency prices down.
On the other hand, there are some currencies that can actually increase in value during times of hardship. Known as the safe-havens, such currencies tend to perform pretty well even during financial crises around the world.
For example, one of them is the USD. As things get worse around the world, many people tend to start buying USD to protect their funds, this happens because of their huge trust in the USD. This supports the price of the US dollar, sometimes even sending it higher.
Fundamental analysis is the process of analyzing the economic events taking place around the world. This can be anything from analyzing the reports from central banks to the general performance of the country’s economy, or other ongoing events. Economic indicators are used by traders during fundamental analysis to determine possible price movements in the market.
Economic Forex indicators can help traders make well-informed decisions. There are different types of them available in the market, and they can be used during Forex trading to determine how the economy of a certain country is doing in general. This can help traders to understand the conditions of the country which can be used to see how the country’s national currency might be performing in the future.
The 5 most important economic indicators for Forex traders are inflation, GDP, nonfarm payroll, interest rates, and global events. All of these can have a massive impact on the general condition of the country, which can also cause price fluctuations in the currency pairs.