Why economic indicators matter in Forex trading
As we already mentioned in our intro, forex is not just about price charts; it is about economics. Key Forex market drivers are macroeconomic indicators, which are released periodically. A currency represents the value of a nation, and economic indicators tell traders whether that value is rising, falling, or stable. Analyzing macro indicators is called fundamental analysis, and it is a major part of forex trading. Together with technical analysis, it enables traders to ensure their trading is aligned with major currency trends dictated by macroeconomic forces.
When economic conditions improve, investors and traders gain confidence, and the currency starts to climb. When conditions deteriorate, on the other hand, investors withdraw from currency and shift their money elsewhere, weakening the currency even further. As a result, we get bull and bear cycles, which are often influenced by major economic factors and not technical price levels.
Major Forex indicators - How they affect the currency
In simple terms, economic indicators affect investors' expectations, and these expectations ultimately lead to the currency rising or falling. To make it clearer, let’s pick a dollar as an example. A strong U.S. jobs report (NFP) will boost the USD because it signals growth and the strength of the US economy. When we discuss major economic indicators, Forex is the first in line to get hit. This is because the currency is the blood of economic life, and it gets the first wave of hits. Weak inflation in the Eurozone can pull down the EUR as it hints at possible rate cuts. Traders constantly adjust their position based on fresh data. What this means is that when this news is released, they either stop trading for a short period to define the main trend or hedge their currency positions. In the end, understanding indicators is essential for anyone trading Forex seriously.
Major Forex indicators list
The most impactful indicators that directly influence currency strength include GSP, inflation, interest rates, employment reports, consumer spending, trade balance, and manufacturing and services PMIs.
Gross Domestic Product (GDP)
GDP is the first entry in our major forex indicators list, not because it shakes the currency the most, but because it is one of the most important indicators to evaluate a country's economic health. It measures the total value of goods and services produced in an economy. When GDP is strong and shows growth, the currency usually rises, and when GDP is weak, it signals economic problems, and the currency usually falls. Usually, GDP is released quarterly and does not cause sharp price volatility; it influences long-term trends and central bank expectations.
Inflation indicators - CPI and PPI
A proper list of main FX indicators is impossible without including major inflation indicators, like CPI and PPI. Inflation affects everything from consumer spending to interest rates. CPI measures price changes for consumers, and PPI measures changes for producers. Central banks use inflation data, such as PPI and CPI, to decide whether to raise or lower interest rates. When inflation rises, the probability of rate hikes increases, and the currency might strengthen. The opposite is true when inflation is falling. Inflation reports usually trigger immediate reaction in currency markets, and increased volatility causes EUR/USD and other pairs to move fast and cover tens of pips in mere minutes. As a result, inflation is among the strongest forex drivers.
Employment reports - NFP and unemployment rates
Among the major Forex market drivers, NFP is the most impactful data. Employment is a real-time signal of economic strength. When more people are employed, consumer spending increases, and economic activity is consequently boosted.
The U.S. NFP or non-farm Payroll report is superior to other indicators because of how impactful it is for forex pairs. When the NFP number is released on the first Friday of each month, forex markets react instantly and violently. For example, EUR/USD is a slow-moving pair that moves 2-4 pips if you zoom into 1-minute or 5-minute charts. The situation drastically changes during NFP release, and this slow pair can move 100s of pips in mere minutes. As a result, NFP is undoubtedly among the key Forex market drivers in the short term, and then in the medium and long term. Here is how it should be read by forex traders:
- Strong job numbers = Confidence is strong among companies, and many of them expand, meaning the currency strengthens and rises
- Weak job numbers = Slowdown fears cause more firms to slow down hiring, meaning the currency usually falls against other currencies
This indicator also influences expectations about future interest rate decisions, making it even more important to watch in your economic calendar.
Interest rate decisions - Key Forex market drivers
Interest rates are the most powerful force in the forex markets. While the NFP causes immediate volatility, interest rate decisions usually extend that to medium and then long term, creating new uptrends or downtrends. Even small changes can often send currencies flying. Here is how it impacts markets:
- Higher interest rates make the currency stronger because it attracts foreign capital as a result of higher yields.
- Lower interest rates push capital away and make the currency weaker, causing downtrends.
Traders watch central bank press releases, speeches, and forecasts to anticipate any possible changes. This is because markets usually move not only on the decision rate itself but also on expectations of what banks might do in the future.
Other major Forex indicators list
Other macroeconomic indicators that impact currencies are retail sales, consumer spending, trade balance, manufacturing PMI, services PMI, and more. Consumer spending drives economic growth, and retail sales are a direct reflection of confidence and financially comfortable households. Rising spending is usually bullish for currencies, while declining makes them weaker. Trade balance is also relevant when analyzing currencies. A trade surplus (exports > imports) makes the currency more valuable, while a trade deficit puts downward pressure on the currency. Manufacturing and services PMI are among the leading economic indicators, meaning they change first, and currency changes follow. When PMI is above 50, it indicates expansions and is bullish, while a decline is bearish.