The relationship between currency pairs is a crucial aspect of forex trading. Traders rely on these correlations to make sense of market movements, often driven by economic indicators. Therefore, learning about economic indicators and their relation to forex pairs is indispensable.
Understanding The Economic Indicators
Simply put, economic indicators help you assess and understand the economy. The economy in question can be a country, as forex trading primarily covers currencies.
Various regulatory institutions, such as central banks and government agencies, release economic indicators for the public to stay updated. Combining these data sets can gauge employment, inflation, GDP, and other aspects of an economy.
As online trading is becoming more advanced, it has become pivotal to consider these economic indicators in real time.
Importance of Economic Indicators
Economic indicators are important primarily because they provide hints regarding potential currency value changes. Since different economic factors can impact a currency’s value, these indicators help create a roadmap to better understand these changes.
Economic indicators directly impact the relationship between the currency pairs. For example, take the USD/CAD pair. If the US economy improves, its value will increase, leading to a positive or negative correlation between CAD. It would also depend on the economic situation of Canada to drive out the correlation.
The Impact On The Forex Trading Strategies
If traders can use an analytical process to understand economic indicators, they can guess the currency correlations. Thus, this will impact their strategy for FX trading. For example, a positive correlation might motivate them to buy, while a negative correlation would make them sell the currency pair.
But economic indicators are just part of the massive data available in today’s tech-driven world. Other aspects, like geopolitical events, policies, and trades, can impact the currency. Economic indicators attempt to cover all these aspects to bring you a comprehensive set of information.
How To Create Your Economic Indicator Analysis?
With an array of sources online, it can become daunting to determine which factors to consider. All you need to do is determine a handful of economic indicators that work for you. Overall, the process of creating your set of economic indicators is easy.
You may begin by compiling these six as your core economic indicator values:
1) Gross Domestic Product (GDP)
This is an indicator of an economy’s overall growth and health. If GDP increases, the currency of that country will also strengthen. GDP is the total of the goods and services produced in a country.
2) Interest Rates
Interest rates charged by central banks or provided in the form of treasury bonds can directly impact economic growth. Higher interest rates in treasury bonds mean better foreign investment, increasing the demand for the currency. However, lower rates could also mitigate the benefits and weaken the currency.
3) Inflation Rates
This is usually the combination of the Consumer Price Index (CPI) and Producer Price Index (PPI). High inflation is a bad sign and decreases the currency’s purchasing power. Low inflation rates are better for currency pairs.
4) Unemployment Rates
Increasing unemployment rates make it unfavorable for the country to live and survive and could directly impact inflation. Similarly, labor market conditions would determine the economic health of a nation.
5) Trade Balances
The trading balance usually contains information on a country’s exports and imports. Higher exports are better for a currency. Higher imports usually mean a decrease in currency power. Trading balances can also help understand future growth or decreases in currency strength.
6) Consumer Confidence Index (CCI)
A high consumer confidence index means that the economy is growing. This means that there will be increasing spending and growth in the currency value, leading to better currency increments.
Using Economic Indicators for Trading Success
Economic indicators give you insights regarding the potential strength or weakness of the currency. You glean information about a possible future and can, therefore, curate your strategy going forward. Even if you’re just starting out with your forex trading journey, economic indicators help you get a better idea of currency demands.
