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Economic Indicators

As I have already outlined in my introduction to forex trading indicators, there are many different types of indicator and fundamental news releases, all of which have varying effects on the forex markets. One which perhaps everyone knows well is the Non Farm Payroll news, released in the US on the first Friday of each month, in which the monthly statistics for the labour market are reported and analysed in detail. Within seconds of the release all the major currencies react violently, generally moving in one direction, only to promptly reverse and trade in the opposite direction as the headline figure is absorbed and then the underlying figures are dissected and analysed. So here are all the other forex trading indicators explained in detail – all of these are based on the US indicators but as you will see there are many similarities across the world, whatever the country or currency you are trading. You can find further details and the latest news on the economic calendar.

Economic Indicators

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  • Gross domestic product

This is one of the big numbers in trading forex as GDP provides information on the economic performance of the country, and reflects the market value of final goods and services produced within the reporting period. In general theses figures are released quarterly, and will often come in three parts, with a preliminary report, an intermediate and a final. The first release generally has the most impact, as it has the surprise element, with all subsequent releases having a moderate impact as the numbers are revised and amended. Whilst the numbers are straightforward, the analysis is anything but, as an increase in GDP can signal both an increase in exports but could also be as a result of increased inventories. The first will have a positive impact on the currency, whilst the second will be seen as negative, so the headline figure is never easy to analyse by simply referencing to the previous GDP figure, or to the market expectation. This is often why the forex markets will react one way on the release, only to reverse suddenly a few minutes later, as the underlying analysis reveals deeper meaning in the headline GDP figure.

  • Industrial Production

This indicator provides information on production changes in the secondary sector and is often considered to be an advanced indicator for the GDP data. This is generally considered to be a leading indicator and therefore provides a clue as to whether the country’s economy is in expansion or contraction. In addition this will also provide some clues as to whether factories are operating at full capacity or otherwise.

  • Retail Sales

Retail sales indicators provide clues to the retail sector, and in some ways can be considered both a qualitative indicator as well as a quantitative indicator. The numbers themselves provide information on the products sold by retail outlets, but this in turn highlights consumer sentiment, and whether consumers are spending or saving, always a clue to the broader economic outlook.

  • Trade Balance

The trade balance indicator reports the balance between exports and imports, and like many other trading indicators is often mis-understood. In simple terms in a recession, the country would like to export more than it imports in an effort to create more jobs and demand in the economy, whilst in an expansion phase, would like to import more, creating price competition and thereby limiting inflation by providing products from overseas which meet capacity and demand without a rise in prices. A trade balance deficit is therefore not always a bad thing, but like all things, extremes can be bad news. A positive number indicates that more goods were exported than imported, and the numbers are directly related to the currency as increased exports require foreigners to buy the domestic currency. The trade balance figures have more importance for certain countries, particularly those who depend on exports for a strong economy such as Japan and Germany.

  • Net Long Term Flows

This economic indicator is one which is closely followed in the US as the country requires significant imports to equalise its balance of payments, and this data therefore has a significant impact on forex rates as a result.

  • Business Inventories

Business inventories once again provide a perspective on the broader economy, with increasing inventories indicating a possible slowing in demand, whilst shrinking inventories can signal positive demand. However, as with all analysis, this simple approach may prove incorrect as an increase in inventories could also be interpreted as a build up for anticipated demand in the future – such is the life of a forex analyst!!

  • Durable Goods

A tricky indicator to analyse which is often revised after release, but one which shows the current order levels for items such as cars, electrical appliances and furniture. The forex markets often react in a volatile and unpredictable manner on release.

  • Factory Orders

One of the less important indicators, which provides a view on the total volume of industrial orders, and since this is released a week after the durable goods it is generally not followed widely by forex traders, and tends to have a relatively muted impact on release.

  • Housing Starts

This is one of the important leading indicators as it details the number of new building projects that have been started in the period, and therefore provides a strong signal for the future prospects of the broader economy, as the housing market is generally the first to indicate both upward and downwards trends. In addition, since housing is generally financed with loans, this data has a broader impact on the financial services and forex markets, affecting both interest rates and inflation as a result.

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