Economic Indicators

Everyone can easily see the economic reports of the private organizations and even the governments, thanks to the Economic Calendars. These reports indicate the economic condition of a given government or organization and are being generated periodically. When it comes to Forex and Stock markets, any out-of-norm and unpredictable reports might cause volume movements and major change in the price. When the economic news are good for a given country, then the currency is stronger, which means that you have to buy it. Here is a brief example, in the currency pair EUR/USD, if the economic news for the US are good, then you should sell. Why? In this pair you are actually selling EUR to buy USD and vice versa – buying EUR and selling USD.

Structure of the Economic Calendar

The calendar is basically a table, full of data. There are multiple variations of the positioning and the order of the rows and columns, but the most important and vital elements are the “Consensus”, “Previous” and “Actual” columns. Let’s take a look at the “Unemployment Rate” indicator in US for 02.12.2011. If you look at the Economic Calendar, you will see the country (USA), date (02.12.2011), the name of the economic indicator, brief information about the indicator, a chart of the volatility and then the period that the actual data refers to. This information is very important, but the next three columns are crucial:

• Consensus is the forecast or the expected value – 9.00%
• Previous is the data value from the previous period (this can be the last month or three months or a quarter of a year, last year or even more) – 9.00%
• Actual is the data value that has officially been announced – 8.60%

What is the meaning of this? In this particular example, the actual unemployment rate was expected to be the same as the rate from the previous month, but in reality it turned out that there was less unemployment in the US. This means that the situation is better than expected and as a result the USD jumped up a little and in the EUR/USD pair (which of the most volatile currency pairs), the USD jumped with 100 pips in an hour. If you have paid attention back there and if you have make a deal with 1 lot, you could have easily gained 1000 USD. Congrats to the winners!

Types of Economic indicators

Which are the most influential figures in the Forex market? Do you remember the economic lessons at school? Let me help you, it`s the investment rate. Generally speaking, when the investment rate of a given country increases, then its currency is stronger and the price rises and vice versa. This is a very strong trading signal in Forex.

Gross Domestic Product (GDP) - the total amount of services and goods, produced by both foreign and domestic companies, in a given country. GDP is an indicator for strong economy. The Forex traders consider the GDP indicator as strong as the investment rate. When the indicator’s value goes down, the signal is for sell and vice versa.

Unemployment Rate – this is another very strong indicator that affects all markets, including Forex. The rate of employment illustrates the development and the strength of the economy. If the unemployment rate is lower, this is a strong signal to buy. This indicator is released on the first Friday of every month and illustrates the level of unemployment of a given country for the previous month.

The Jobs Report - Non-Farm Payrolls - this index is most often used to illustrate the change in the number of employed people in the US (the farming industry is excluded here) and it is published on every first Friday of each month. In order for the economy to grow stronger it needs to create 125 000 new jobs per month. However, if the value of the actual NFP is higher than the forecast (consensus), then this is a signal for strong economy and you should buy the currency.

Producer Price Index (PPI) - combines most of the sectors in the economy: mining, manufacturing, agriculture, etc. The index illustrates the average price of approximately 3500 commodities. The main difference between PPI and CPI is that CPI indicates imported services, goods or taxes.

The Consumer Price Index (CPI) – points out the average change in the consumer goods and services across more than 190 different categories. There is fixed market basket of goods and services. The data contains prices for shelter, fuel, food, medical and education services and etc. - things that people use on daily basis.

Trade Balances - Every government announces data illustrating the balances of the trades with almost every country. This indicator is lagging, but its value changes the currency’s price. When the export is more than the import, then the currency is growing stronger and vice versa.

Retail Sales - Many traders follow the Retail sales, because it is an important consumer-spending indicator. RS measures the connection between the consumers’ demand and consumers’ confidence. The rate of the retail sales is vital for every country, especially the United States. This is a seasonal indicator and the experienced forex traders observe the rate in December and in September. December is important, because this is the feast season and September is the back-to-school month. This indicator is watched on a monthly basis.

Housing Start – illustrates the changes in the total number of new houses built in a given country. This is very important, because building a house requires a lot of investment. Furthermore the real estate sector typically leads the growth in the economy, because the consumers also have to invest a large sum of money to buy new houses; this is a good connection between the consumers and the corporate sector. If the data for this indicator is declining, it is a signal for economy weakening and you should sell the currency in question.