We will look at some of the key economic data points for the Forex market and understand them in greater detail. Before we progress let's also see what we won't be discussing; we will not discuss central bank rate decisions or other market events that are not truly economic data points. For that read our market insights resource.
The economic data influences how the Forex market fluctuates and every trader worth its salt will keep a keen eye out for the economic data releases. Due to the broad nature of economic data, we will keep our discussion limited to the G10 Forex market (10 most heavily traded currencies in the world), and within that space, we will only discuss the most important economic indicators.
Before we go into further details, let's divide the economic data points further into leading, lagging and coincident economic indicators. This will help us understand the nature of economic data points. Lagging economic indicators show, how the economy has done while Leading economic indicators show how it is likely to do in the future. Coincident Economic Indicators show the current economic situations. We shall first discuss the Lagging economic indicators.
Lagging Economic Indicators
The key Lagging economic indicators include Inflation, Unemployment Rate, and Trade Balance. These indicators show how the economy is fairing but due to the lagging nature of the indicators, it can be difficult to ascertain how it is likely to do. Might have heard "past returns are no guarantee for future returns!"
Inflation or Consumer Price Index is released monthly for most G10 countries barring few and in our view is probably one of the most important indicators in the Forex market. According to the bookish definition, Inflation is a steady rise in the price level of goods.
A high rate of inflation leads to erosion in the value of money because average income levels don't compensate for a quick rise in CPI. This can often lead to a decrease in the consumer purchasing power which in turn can lead to a decline in living standards. Inflation also impacts job growth, GDP and trade balance. However, a stable low level of Inflation is a good thing as it encourages spending and investing which helps the economy grow.
The unemployment rate is a lagging indicator and is released monthly for most of the G10 currency countries. The unemployment rate is the percentage of unemployed workers in the total workforce and does not include people not looking for work. This indicator can often be misleading as it doesn't take into factor the people who have been discouraged from looking for work. Also, it treats unemployed and self-employed (some of whom might be ) on par with the fully employed.
The trade balance is the difference between the total value of exports and the total value of imports. It shows whether the money is coming in (there is a trade surplus) or the money is going out (there is a trade deficit) when trading with the world. A trade surplus (mostly) helps the economic situation of a country, as it allows the nations to borrow at a lower rate of interest, and grow at a faster pace than the domestic economy can allow. A trade deficit mostly leads to a worsening economic situation and a higher cost of borrowing. Consistent Trade deficits lead to higher domestic debt, as money needs to be borrowed to pay the dues. This can often lead to devaluation of currencies and higher borrowing cost.
Leading Economic Indicators
Leading economic indicators include Purchasing Managers' Index, Business Confidence, and Consumer Confidence. These indicators show how the economy is likely to fair and is important when forecasting currency movements.
Purchasing Managers’ Index
Purchasing Managers’ Index is a survey that summarises how purchasing managers view market conditions; whether they see business conditions expanding, contracting or staying the same. The survey is conducted monthly and is represented by a headline number between 0-100. A number above 50 represents expanding activity while a number below 50 represents contracting economic activity.
Purchasing Managers’ Index has two important constituents; Manufacturing PMI and Services PMI. It is a leading indicator and tends to precede changes in economic activity, such as the GDP, Industrial Production, and Employment.
Business Confidence is another opinion-based surveys that assess business conditions. The methods vary from country to country but the indicator provides information on current and expected business conditions. Some of the popular ones are BCI (U.S.), Ifo Business climate (Germany), CBI Business Optimism (U.K.), and NAB business Confidence (Australia).
Consumer Confidence is another leading economic indicator that provides a glimpse into expected future spending. If consumers feel safe and positive about the economic environment, the consumer is likely to spend more than save more. if the consumer is uncertain about his/her economic future than the consumer is likely to save more than spend more. Consumer confidence tends to improve and decline with the rise and fall in economic activity, respectively.
Coincident Economic Indicators
Coincident economic indicators include GDP, Retail Sales, Personal consumption and expenditure (PCE). These indicators show how the economy is fairing currently and is important when confirming what leading indicators forecasted.
Gross Domestic Product
Let’s look at the GDP Growth rate first, GDP data is released quarterly and countries such as the U.S and Euro have preliminary releases. The GDP Growth Rate shows the changes in the Gross Domestic Product (total value produced by an economy) over a period of time and therefore, if the economy is growing faster than it has done before, we will see a rise in the GDP growth rate and if the economy is growing slower than it has done before, we will see a fall in the GDP growth rate. However, there are serious issues with GDP as an indicator of growth. For starters, GDP just looks at the value of goods and services added in the economy and doesn't take into account the nature of these activities. For example, if people of a country are living an unhealthy lifestyle and they spend heavily on health care the GDP will show the economy is growing. Let’s take another example; if oil prices rise sharply and people spend more on their energy needs the GDP growth rate will go up. However, it is still an important indicator when it comes to suggesting recession. As a general rule, two consecutive quarters of decline in the GDP (negative growth rate for two straight quarters) suggests recession.
Retail sales measure the purchase and sales of non-durable goods over a period of time. The figure tracks consumer spending habits and provides insight into whether an economic activity is improving or deteriorating. However, the data is susceptible to sharp moves and changes in weather.
Personal consumption and expenditure (PCE)
Personal Spending and expenditure (also known as Personal consumption and expenditure PCE) is another coincident economic measure that shows consumer spending habits. However, it is broader-based than retail sales as it shows almost two-thirds of final spending. PCE shows how much is the household spending on current needs and how much it is saving for the future. It is a comprehensive data point to see how the economy is fairing.
The key economic indicators discussed above are not exhaustive but are very important to understand before one trade Forex. We will discuss next how to relate these economic indicators to trading.
The Short Answer
What are the Top 10 economic Indicators for the Forex Market?
Inflation, Unemployment Rate, Trade Balance, Leading Economic Indicators, Purchasing Managers’ Index, Business Confidence, Consumer Confidence, Coincident Economic Indicator, Gross Domestic Product, Retail sales, Personal consumption and expenditure (PCE)