In the world of Forex trading, information is gold. And the most valuable information is economic indexes. These are measures that directly reflect the macroeconomic situation of a country, thereby strongly affecting the currency value. For a trader, understanding and correctly analyzing these indexes not only helps forecast the market but also is the foundation for building an effective trading strategy. Let’s explore the most essential economic indexes that you cannot ignore in the following article.
What are Economic Indexes?
Economic Indexes are statistical data reflecting the economic situation of a country, published periodically by government agencies or financial institutions. In the Forex market, these indexes play a very important role because they directly affect the price of a country’s currency.
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Impact of Key Economic Indexes?
- Impact on exchange rates: Positive economic indexes can strengthen the currency, and vice versa.
- Monetary policy guidance: Central banks often rely on these economic indexes to make decisions about interest rate adjustments or other policies.
- Creating Volatility: When economic indexes are released, especially when they are far from market expectations, the values of currency pairs can fluctuate greatly.
The most important Economic Indexes to watch
Below are the economic indexes that have the biggest impact on the Forex market:
Consumer Price Index (CPI)
- Influence: Big
- Time of announcement: Usually in the first half of each month
CPI stands for Consumer Price Index. This is an index used to measure the price change of a basket of common goods/services consumed by people in a specific area, calculated over a certain period.
Normally, CPI is used as a “measure” to assess the impact of inflation on people’s lives. Then, based on this data, the government and financial agencies will plan appropriate economic policies to control prices and maintain financial stability. Therefore, CPI has a great influence on the FED’s interest rate policy as well as the decisions of the Central Bank.
How CPI affects Forex:
- In case the CPI is announced lower than forecast, or decreases sharply compared to the previous period, this will reduce inflationary pressure. The FED will be able to achieve its deflation target early without having to raise interest rates too much. The FED can even lower interest rates. This causes currency pairs to appreciate.
- However, on the contrary, if the CPI is announced higher than expected, it can create inflationary pressure, causing the FED to tighten monetary policy and increase interest rates, and of course the foreign exchange market will then become more difficult.
Gross domestic product (GDP)
- Influence: Big
- Time of announcement: 30 days after each quarter
Gross Domestic Product (GDP) is an index used to measure the total production of a country in a certain period of time (usually a quarter or a year). GDP is the total value of all products/services produced by businesses, individuals and organizations in a country, excluding products/services that the country imports from abroad.
GDP is considered as an important forex economic indicator of a country’s economic strength and is used to compare with other countries. In addition, it can also be used to evaluate a country’s economic situation over time and to manage economic policies.
Normally, GDP will have 3 announcements: Advance, Preliminary and Final. Of which, Advance GDP is announced earliest and has the greatest impact.
How GDP Index Affects Forex:
- In case of GDP growth, this reflects the economic growth of that country and can also lead to an increase in the value of the domestic currency of that country. This causes the dollar to grow and at that time the FED can use this to maintain its tightening interest rate policy. This will cause trouble in the foreign exchange market.
- In the opposite case, that is, GDP decreases or falls short of expectations, this causes the currency in that country to “fall in value” and causes a decline in the Forex market. This can cause the dollar to fall and the FED to loosen monetary policy. From here, traders can pour money into the Forex market as a way to protect the value of assets against the risk of economic recession.
Non-Farm Payrolls (NFP)
- Influence: Big
- Time of announcement: Usually on the first Friday of the month
The Nonfarm Payroll (NFP) is a monthly statistical report published by the US Department of Labor. It is used to measure new jobs created outside the agricultural sector in the previous month in the United States. NFP is an important indicator to assess the economic situation and the labor market situation in the United States.
The NFP bulletin includes three main indicators: the number of new jobs created, the unemployment rate and average hourly wages.
Usually at the beginning of each new month, the NFP bulletin will be announced, which is one of the most important economic indicators in the US, and at the same time causes a significant impact on financial markets around the world. Based on the NFP index, investors, fund managers and policymakers will be able to accurately assess the labor market situation at that time. From there, make decisions related to investment and risk management.
How Nonfarm News affects Forex:
- If the Nonfarm payrolls report comes out better than expected, it will boost confidence in the economy, and in turn push up the value of the US dollar. This will have a negative impact on the Forex market.
- Conversely, when the Nonfarm payrolls report shows a decline or worse than the previous period, it can reduce confidence in the economy and push the value of the US dollar down. At that time, currency pairs in the market will increase in price.
Producer Price Index (PPI)
- Influence: Large average
- Time of announcement: Usually in the first half of each month
The Producer Price Index (PPI) is a tool that measures the change in prices of goods/services produced by companies in a specific region over a certain period of time. It is considered a “measure” to assess the pressure on the profits of manufacturing enterprises, and is often accompanied by the CPI index. Economic policies will be based on PPI, thereby adjusting interest rates with the main purpose of keeping prices and the economy stable.
How does PPI affect Forex:
- If the PPI comes in better than expected, this implies that the economy is growing strongly, which is expected to lead to an appreciation of the US dollar. This could have a negative impact on the foreign exchange market.
- In the event that PPI is lower than expected or shows signs of decline, the value of the Forex market may increase because investors start pouring money into it as a way to protect against the risk of an economic recession.
However, the impact of PPI index on the foreign exchange market may not be clear and needs to depend on a number of other factors.
Purchasing Managers’ Index (PMI)
- Level of impact: Large average
- Time of announcement: Usually on the first administrative day of the month
The Purchasing Managers’ Index (PMI) is a forex index that measures the health of a country’s manufacturing and service sector, based on information collected from purchasing managers in manufacturing and service companies.
Specifically, PMI helps to indicate changes in manufacturing and service activities, such as output, orders, prices and hiring capacity. Planners rely on these to predict economic trends.
How PMI index affects Forex:
- When PMI < 50 or the result is lower than expected, it shows that the economy is in recession, the labor market is weak, the FED may cut interest rates and the US dollar will lose value. This will cause the foreign exchange market to grow.
- On the contrary, PMI > 50 or better than expected, this shows that the economy is growing, the labor market is abundant, the FED can raise interest rates and the value of the US dollar also increases. This causes negative effects on the Forex market.
Personal consumption expenditures (PCE)
- Level of impact: Large average
- Time of announcement: Usually at the end of the month
Personal Consumption Expenditures (PCE) in the US economy is considered a very important statistical index. The PCE index measures the total value of all goods/services that consumers buy and use for consumption in a certain period. PCE includes spending on all types of goods and services, including: spending on health, education, pets, entertainment and construction materials.
How does the PCE index affect Forex:
- PCE affects the Forex market by influencing the Fed’s decisions on monetary policy and interest rates. When PCE rises, the Fed may decide to raise interest rates to control inflation. This can reduce the value of high-risk assets in the Forex market.
- However, if the PCE rises slowly and below expectations, the FED may decide to keep or even cut interest rates, aiming to stimulate economic growth. This increases the value of the Forex market, because investing in high-risk assets becomes more attractive than ever thanks to low interest rates.
US Retail Sales
- Level of impact: Large average
- Time of announcement: Usually in the first half of each month
Retail Sales (US Retail Sales) is a monthly statistical index published by the US Department of Commerce. This index is used to measure the total value of items sold to people at retail stores in the US, including items such as: food, clothing, transportation, transportation services,…
How US retail sales affect Forex:
- When retail sales fall more than expected, this reflects a decrease in consumer demand, which could lead to a recession. At this point, the FED will have to decide whether to loosen monetary policy or slow down the pace of interest rate increases, which will benefit the foreign exchange market.
- Conversely, when retail sales increase more than expected, it shows that consumer demand is increasing, helping the economy to grow strongly and is a sign of economic recovery. If placed in the context of high inflation like at that time, this will help strengthen the FED’s decision to raise interest rates, thereby putting the Forex market at a disadvantage.
Where to see news about Economic Indexes?
You can update news about Economic Indexes at some highly reputable websites such as:
- Bloomberg: The leading website for global financial news.
- Forex Factory: Provides economic calendar and important market information.
- Investing.com: A diverse source of news on financial markets and forex.
Conclusion
Above are the important Economic Indexes that every trader should know and should not miss in order to grasp the market situation and forecast trends most effectively. Don’t forget to visit the Tipstrade.org website regularly to be updated with many other useful Forex investment knowledge!
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