Economics plays a great role in forex trading, so automatically, economic indicators become important for future investment plans. All around the world, successful forex traders use economic indicators to analyze the current and future market trends, which help them make decisions about their future investment possibilities. Multiple types of economic indicators affect the overall situation of the currency market in a variety of ways.
Economic indicators help us understand the past, current, and future trends in economies, leading us to understand the market. As a result, we can make effective strategies and the right decisions to succeed in the market.
Pro forex traders use all types of information, which gives them even a bit of market hint. This information includes economic indicators, economic calendar, surveys, departmental reports, government policies, and reports and technical indicators. Economic indicators are country-specific; means the policies of specific countries will affect its respected currency. For example, American policies will affect the value of the US Dollar, which is one of the main currencies in the forex world. As US Dollar plays an important role in global economics and is also one of the mainstream currencies in the forex world, The US policies and indicators also affect the overall market situation.
Mainly there are three types of indicators:
As suggested by its name, leading indicators lead us towards a successful hint of the next market value. It helps in the decision-making process while trading in the forex world.
Lagging indicators deal with past events. It is the most effective indicator as it reads past events and analyzes them to give us a general idea of how the market behaves and how it will behave.
Coincident indicators analyze current events and market trends and help us understand the market’s general situation.
Important economic indicators
There can be multiple indicators for forex traders, and all of them are important, but some are the most important, which has a highly accurate indication rate.
Gross domestic product (GDP)
GDP is the most important measure for the progress of an economy. The compilation process of GDP reports is so long that many of its parts become already known before its final publication. As a result, indication through GDP growth proves highly accurate.
Non- farm payroll is one of the most important economic indicators closely related to US GDP. Why is it so important? One of its important reasons is that it also affects US monetary policy, directly linked with the forex world.
The unemployment rate is another economic indicator that tells us the overall situation of an economy. A long period of unemployment is highly destructive for an economy.
Consumer price index
The consumer price index, also known as CPI, gives us an idea about how quickly prices are rising or falling. As monetary policy also got affected by CPI report, it can have a huge effect on the forex markets. Again, it is the deviation from the predicted results that usually has the greatest impact. For instance, if the CPI value is much higher than expected, it signals that monetary policy will be tightened as we advance.
US Federal fund rate
Most US economic indicators are also important for all forex traders as they hold a powerful position in the forex world. US Federal Fund rate is also important for forex traders because it gives them a general prediction about the interest rate of dollars. The Federal Open Markets Committee (FOMC) arranges its meetings eight times a year to determine the monetary policy of the United States. The outcomes of these meetings can greatly affect forex trading.