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The Economics of the Foreign Currency Exchange

Foreign Currency Exchange and CPI

When you trade on the foreign currency exchange you need to consider what the economics of the market are.  These economics can be used to analyse the market movements.  This analysis will be done through fundamental analysis.  It is important that you know what the major economic reports are that affect the foreign currency exchange.  These reports are the ones that you are generally going to use with fundamental analysis.

Foreign Currency Exchange Economic Indicators

Country’s have specific reports that indicate the economic performance of that country in a particular sector.  The reports are normally published by governmental or private agencies on a periodic basis.  The periodic publication of the reports allows investors to compare similar periods.  If these reports deviate from the expectations of analysts or economists, it could cause huge movements in the foreign currency value of certain countries.


The gross domestic product of a country is considered to be the widest measure of the economic performance of a country.  It is representative of the total market value of the services and finished goods produced in a specific country for a period of one year.  Many traders generally ignore the final GDP report and instead focus on the two initial reports that are normally issued a few months prior to the final report.  These two reports are the preliminary and advance reports.  The reason for this action is that the traders consider the final report to be a lagging indicator which means it is not indicative of the future trend.  This makes it useless to most traders who are on the lookout for a means to identify a trend.  The gross domestic report is often compared to a company’s income statement which provides investors an indication of the growth of the entity during the past year.

The Retail Sales

The retail sales report measure the total amounts received for sales of merchandise sold in a country’s retail stores.  It makes use of estimated figures by taking a sampling of particular retailers across a wide spectrum of the country.  Traders can use this report to assess the direction the economy could be taking as consumers are representative of more than 66% of the economy.  The data in this report is based on the sales of the previous month which gives it more credence than the GDP report, in the forex market.  The results of this report are able to cause above average volatility in the financial markets and this information can be used to gauge possible inflation rates.

The Consumer Price Index

This economic indicator measures the pricing changes in a country’s economy and is the basis for the measurement of inflation.  It makes use of a basket of goods that represents the services and goods in that country’s economy.  The CPI is a measurement of the price fluctuations of that basket of services and goods year upon year.  This is an extremely important report and upon its release there is the chance that the markets will experience increased volatility.  For forex traders, the release of this report can mean huge movements in currency prices.

This is a short overview of the major reports that affect this financial market.  There are several other reports that you need to be aware of and keep tabs on to allow you to trade effectively.



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