What are the most important economic indicators that you can find in a forex calendar and how do they impact on exchange rates? The exchange rate plays an important part in determining the economic health of a country, since it has a significant role in the national level of trade. A stronger currency makes imports to the local market cheaper and exports less competitive. On the other hand, a weaker currency is good for imports while making imports more expensive. Because of this, economic analysts spend a lot of time monitoring exchange rates while fiscal officials decide whether to intervene in the financial markets to manipulate them. Here is a breakdown of some of these economic factors:
- Interest rates. There is a strong relationship between interest rates and the exchange rate. When interest rates are higher, they attract foreign investors to the financial markets who are drawn by the possibility of higher returns relative to those they can get in other countries. When domestic interest rates increase, therefore, the exchange rate appreciates vis-à-vis other currencies. Interest rate decisions of national central banks are some of the most monitored figures in the forex calendar.
- Gross Domestic Product (GDP). The GDP is a measure of domestic economic activity and thus, shows how healthy the economy is. The forex calendar lists two GDP releases: the advance figures and the preliminary report. The difference in GDP between these two releases, which can be significant due to revisions, can cause volatility in the financial markets. When GDP growth is larger than anticipated, the exchange rate is expected to appreciate due to anticipation of higher interest rates.
- Balance of trade. This indicator measures the ratio of the value of exports compared to those of imports. If exports rise at a higher rate compared with imports, there is an increased demand for the domestic currency, causing the exchange rate to appreciate.
- Consumer Price Index (CPI). The CPI is a measure of the change of the prices of goods and services in the local economy over a particular period, typically month to month or year to year. When a country consistently has lower inflation rates, the exchange rate of its currency appreciates. Because of this, traders consider the CPI one of the most important in the forex calendar.
- Retail sales. This is a measure of the growth of sales to the end-consumer in the retail sector and is expressed as a percentage. When the figures are higher than anticipated, the exchange rate appreciates.
- Unemployment rates. This indicator measures how many people are out of work and looking for work in a particular survey period, and is expressed as a percentage of the total labor force. The higher the unemployment rate, the weaker the exchange rate will be.
- Industrial production. This indicator measures changes in the value of the output of manufacturing establishments, utilities and mines, adjusted for inflation so it can be compared with past figures. Better than expected industrial production will cause the exchange rate to appreciate.