Top 5 Economic Indicators In Forex Trading

Forex traders consider certain economic indicators in making their investment decisions. Some of the most important economic indicators every trader should be aware of include interest rate decisions, Non Farm Payrolls, retail sales, trade balances and consumer price index.

1. Non Farm Payrolls. The Non Farm Payrolls indicate employment rates and overall strength of the labor market. The indicator provides a broad overview of all business employees except NGO, private households and the general government employees. The indicator provides an account of more than 80 percent of the workforce that contributes to the GDP. The report also provides estimates of the average work week as well as weekly earnings for different employees. Because Non Farm Payroll is a general indicator of the health of the economy, forex trading is affected by this factor. Generally, traders sell the dollar when the NFP is lower in the belief that the currency is weakening.

2. Federal Open Market Committee Interest Rate. This sets the federal funds rate or discount rate. The Federal Reserve Bank charges banks for overnight loans at this rate. This interest rate has a significant impact on the stock exchange.

The FOMC sets interest rates higher to encourage foreign investment during inflationary periods. The rate is set lower to encourage spending during recession. The interest rate indicates the strength of the dollar. An increase in the interest rate leads to a strengthening of the dollar while a decrease normally precedes depreciation. Therefore, during depreciation, traders buy the dollar expecting an increase in value and short the dollar when the interest rate reduces. Traders closely follow the eight FOMC meetings scheduled at different parts of the year to make their investment decisions.

3. Trade balance. This acts as a measure of the value of goods and services imported or exported by the US. It can also be viewed as the difference between national investment and savings. When exports exceed imports, it creates a surplus and a deficit when imports exceed exports. These situations are affected by various factors such as exchange rates, price of domestic goods, trade regulations and tariffs. Most traders consider a deficit as a weak economy, which makes them short the dollar, and the opposite is true.

4. Consumer price index. This statistical measure represents inflation based on certain consumer goods. CPI is a useful indicator in trading at the stock exchange. However, trader reaction to CPI is difficult to predict. A high CPI indicates a weak economy. This prompts traders to short the dollar. It may also indicate an increase in interest rates in the future, which may make other traders to buy the dollar. This is why it is difficult to predict investors reaction to an increase or decrease in the CPI.

5. Retail Sales. This figure measures the amount of goods sold by certain stores to gauge consumer activity and confidence in the economy. High retail sales indicate a strong economy. Generally, traders in the stock exchange trade more when retail sales are high and short the dollar when retail sales drop.

Back to Forex Education Centre

Providing the latest Live Forex Rates and currency data for the UK.