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The Economics Of Foreign Exchange Rates

This article covers the economic reports and indicators that could have an impact on foreign exchange rates.

Foreign Exchange Rates and Economics

Forex traders rely on two types of analysis – technical and fundamental.  Technical analysis makes use of chart analysis and reviewing indicators.  Fundamental analysis is a complete different method and makes use of analysis of economic indicators and reports related to a specific country.

To try and figure out how much you think a country is worth, you need to look at the country’s economic climate.  There are several major economic factors that affect the foreign exchange rates of countries and for you to trade effectively, you need to be aware of these factors.

Indicators

Economic indicators of a country show its detailed performance in a particular area.  These reports are normally published by the different governments on a periodic basis.  This allows you to compare the changes from one period to the next.  If the results of these reports differ greatly from what was expected by analysts or economists, it can affect the forex market quite drastically.

Consumer Price Index

This particular indicator is seen as a benchmark for the measure of inflation.  It measures the price change level in the country’s economy.  By making use of a basket of goods that represents the services and goods in the country’s economy, this indicator measures the changes in price of those goods from one year to the next.  This is an extremely important economic report which could cause volatility in the forex market.

Gross Domestic Product

The gross domestic product of a country is considered to be the widest measure of the economic performance within a country.  It is representative of all the services and finished goods produced in a specific country during a particular year.  Many traders ignore the final report and rather place their focus on the two advance reports – the preliminary and the advance GDP reports.  The main reason for this is that they consider the final report to be a lagging indicator.  This means that it simply confirms a trend, but it is unable to predict a trend.  This type of information is useless to traders who are seeking to identify a trend.

Retail Sales and Foreign Exchange Rates

This is an extremely important report and closely scrutinised by those in the financial markets.  It indicates the total value of all goods sold in the retail trade in a country.  The report is composed from sample data from various retailers in the country.  As consumers make up more than 66% of the economy, traders find this to be a very useful report to try and predict the direction of the country’s economy.  It is a timely indicator as the figures reported relate to the sales of the previous month.

Industrial Production

This report reflects the changes that have taken place in factory, mining and utility production in a country.  One of the more closely watched indicators in this particular report is the capacity utilisation ratio.  This is an indicator which estimates the production activity level in a country.

This is a short overview of some of the economic reports you should keep abreast of as a new trader in this financial market.  There are several other factors and reports that may affect the foreign exchange rates of a country.

 

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