If you want to do forex trading in Sri Lanka, you would need to understand that economic indicators can have a huge impact on the currency market. Economic indicators show the strength and potential of an economy of a country. They provide you with a complete picture of an economy’s current and potential standing with factors like GDP and unemployment rate. Forex traders take interest in these indicators as these indicators help in comprehending the direction forex market might take in future.
A crucial news release related to economies around the world can lead to volatile situations in the forex market and force a specific pair of currency to move in a particular direction. It can be upward, downward, or sideways. Every week several news releases are made associated with various economic indicators and in today’s digital era, everyone can easily access the news and information to understand the mechanism of the forex market in the light of various economic indicators.
News pertaining to the economic indicators can have a huge impact on the Forex exchange. Given below are the main economic indicator news categories that you should know before entering into forex market:
Interest Rates By Central Banks
Every month, several central banks around the world from different economies gather to decide about their interest rates. They decide whether to let the interest rates remain unchanged or raise the rates, or bring down the rates. These interest rates are very important and make a vast impact on the foreign exchange market.
When there is an increase in the interest rate, the market usually takes a bullish trend and that means there will be an increase in the value of the currency. On the other hand, when the interest rate is brought down to a lower level, the forex market is expected to take the bearish trend, which means that there will be a decrease in the value of currency price. For unchanged interest rate, the market can take any direction based on the circumstances of the concerned economy at that time.
Along with the change in interest rate, the policy statement is also released providing with the complete sum-up of the economy and what could be the future of the economy. In addition, the monetary policy of the economies is also declared, associated with the essential financial matters of the country.
Gross Domestic Product or GDP
The Gross Domestic Product is a very crucial factor representing the overall economic condition of a country. Basically, GDP is the total value of all goods and services that have been produced by a country over the course of a period of time like annually. GDP does affect the price movements of the currencies in the foreign exchange market.
When the gross domestic product of a country is not up to the expectations of the market, it can be said that the currency values might go down. Similarly, when the GDP of a country is beyond what the market has been expecting, the values of the currency is expected to move upwards. Th GDP figures are diligently evaluated by the forex traders as it also helps in recognizing or anticipating the future moves of the central banks.
GDP is also a very significant economic indicator as it helps in identifying the current situations of the business cycle of a country. The business cycle is kind of a combination of expansion and recession cycles. During the expansion phase, many sectors of the economy expand or grow together, and in the recession phase, the growth rate of those sectors starts to contract.
Thus, GDP is a leading factor is analyzing the foreign exchange market. As a forex trader, you must be aware of it and you must also understand that it is a lagging economic indicator which confirms the things traders are already expecting.
Consumer Price Index - CPI
The consumer price index or CPI shows the cost of goods and services and is also recognized cost-of-living index. CPI helps in managing and controlling the rate at which prices of the good or services rise or fall. The CPI appraise the inflation rate (the rate at which the price of goods and services rise in an economy) which is a part of people’s lives through their everyday expenses. When there is any sign of a rise in the inflation rate, it means the central banks will have to increase the interest rates. Higher interest rates mean the bullish trend in the market.
When inflation stays inside the anticipated levels, it is regarded as a regular figure. Nevertheless, if inflation swerves farther from the target levels for a longer period of time than expected, it can result in a negative outcome for the economy.
CPI is a part of monetary policies, as a result, it can have a higher effect on prices in the forex market.
Non-Farm Payroll - NFP
For a majority of forex traders, non-farm payroll or NFP is one of the most crucial indicators in the all the news releases that come out on regular basis like every month. The NFP report is released by Bureau of Labor Statistics (BLS) on the first Friday of every month. The BLS also declares the unemployment rate as a component of the Employment Situation Report. The report comprises of the data figures for the new jobs which have been created in the US together with some other labor market information. The data comprises of all the workers that have been paid, however, the data leave out the government workers, personal households, non-profit establishments, and agricultural industry.
The main reason behind why NFP is so important and is followed so industriously is because it has a propensity to bring substantial movements in the forex market.
It partly depends on the timing of the release of the report.
There is a close relation between employment rate and the business cycle. The changes in NFP or non-farm payrolls is quite similar to the changes in GDP on a quarterly basis. It means that NFP can be utilized as a proxy in place of GDP. The main difference between NFP and GDP report is that NFP is released on a monthly basis and GDP report comes out on a quarterly basis. In addition, while NFP reports the data of the last month, and GDP reports the delayed information. Apart from the connection between NFP and GDP, NFP report also has the impact on monetary policy of the economy and in which direction the policy will move.
ADP National Employment Report
The ADP National Employment Report comprises the economic data concerning the levels of non-farm private employment in the U.S.A. The report is released on monthly basis. ADP stands for Automatic Data Processing, which is also the firm that has been accumulating the employment data and preparing the reports since the year 2006. ADP gathers the data using the payroll facilities and services it delivers to the about 1/5th of the U.S. private employment.
The ADP report comes out two days before the NFP report released by the Bureau of Labor Statistics. Traders in the forex market look at the ADP report as a preview of the more extensive and elaborated reports that are released by the government.
The overall ADP report is categorized in 4 distinct parts:
- The first category comprises of a national snapshot which displays the changes in the data figures non-farm private payrolls and divides the data based on business size and industry.
- The second category comprises of the data figures of the small businesses, which is further divided on the basis of small and very small sizes of the businesses, and is also divided based on whether the business delivers goods or services.
- The third category shares the data regarding the franchises and divided the data based on the sector, which is further divided into the industry like restaurants, real estate, and so on.
- The fourth category shares the data based on regions and it mainly highlights the data changes in six prominent states of the USA including New York, Texas, California, Florida, New Jersey, and Illinois. Each region is further divided into sector and industry.
One of the other reasons for why ADP is such an important indicator for forex traders is because if the employment figures show a continual and strong growth for a period of time, it escalates the inflationary rates and because of that, the Federal Reserve may also increase the interest rates and vice-versa. This will impact the forex market depending on the market situations and economy’s present and potential standing.
FOMC - Federal Open Market Committee
Even though the meetings of central banks from different economies are very crucial when it comes to economic indicators affecting the forex market price movements, the Federal Open Market Committee of America is also very important and its meetings have taken the center stage as the US Dollar is at the moment most powerful currency in the world.
Every month the FOMC meeting takes place in order to decide on rates and to provide information about present economic conditions, how effective the current monetary policy is, and what are future expectations from economic conditions and monetary policy.
FOMC meetings can have a vast impact on the volatility of the forex market. The Federal Open Markets Committee meetings are conducted eight times every year and the outcomes of these meetings are highly anticipated by the forex traders as these meetings can affect the demand and supply of the currency pairs in case the outcomes is not as expected.
The trade balance is the difference between the value of the imports and exports of the economy of a country. If the value of exports is higher than the value of imports, the balance will be positive. Similarly, if the value of imports is more than the value of exports, the balance will be negative. In all of this, the exchange rate of the economy’s currency plays a very big role.
To trade successfully in the forex market, traders need to know the exchange rate and the information about a country’s net exports can help the forex traders in analyzing and predicting the future movements in inflation rate and foreign investments. This gives the hints about how the currency market may behave in future.
Trade balance comprises of three main factors:
- The monetary value of goods produced in a country
- Tax and duties applied the goods that have been exported and imported
- The foreign exchange rate between the currencies of two economies.
The foreign exchange rate between two countries is the most fundamental factor for forex trading in Sri Lanka. As the trade balance of an economy relies greatly on the exchange rates between two countries, the trade balance is a main economic indicator for the foreign exchange market. A country’s trade balance is also crucial in measuring the net income of the country through foreign trade
The trade balance helps the economists and forex traders in evaluating and comparing the economic strength of one country to another. If a country has a large trade deficit i.e. large negative trade balance, it would have to borrow the funds from other trading partners in order to buy goods and services. The Trade balance reports can create substantial movements in the forex markets if the data has evidential changes as compared to previous reports.
Retail Sales Report
The proper name for retail sales is Advance Monthly Sales for Retail Trade. However, for forex traders, it is retail sales. The retail sales report is released by the Census Bureau, which is a division in the U.S. Department of Commerce.
This report provides with an early estimation of the value (in dollars) of sales for the retail sector. Although the sales do not include inflation rate adjustments. The report also shows the percentage change in the value of sales from the preceding month.
If the retail sales figures are growing, it shows that the economy is in good health and as a result, forex market takes up the bullish trend. The usage of the retail sales report in forex trading is clearly understandable as the report offers the very particular data about the industries and products on which customers are spending a large part of their income. Retail sales report is one of the most valuable economic indicators in the forex market and using this indicator, the forex traders can surmise the price movements in the forex market to some extent.
If you want to learn about how these economic indicators are useful in forex market analysis, you can refer to ‘ Fundamental and Technical Analysis in Forex Trading ’.
In addition, if you are interested in knowing about forex brokers in Sri Lanka, you can go to, ‘ Where to trade Forex Online and type of Forex brokers ? ’.