Further economic indicators

Before reading this article, you should have previously read through:

There are further economic indicators that contribute to a currency value increasing or declining. This lesson explores additional common economic indicators that affect a currency value.

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Unemployment rates

Low unemployment rates mean a strong economy, which increases the demand for the currency.

The unemployment rate measures the percentage of the labour force that does not have a job and is actively seeking employment.

If a low unemployment rate is reported, then investors may believe the economy of that country is good. Therefore, they may seek investment opportunities in that country, causing a rise in the value of that currency. A country with a rise in unemployment could be interpreted by investors as a weakening economy, causing investors to seek opportunities elsewhere, and so the currency may depreciate.

Gross domestic product (GDP)

GDP measures the total produce of goods and services for a country.

GDP measures the total amount of consumer spending, investment spending, international trade and government spending within a country over a certain period of time. It essentially measures the total produce of goods and services for an entire country. GDP is mostly measured on a quarterly or annualised basis.

If the GDP growth rate is high, then the economy is considered to be robust and the currency will likely appreciate in value. If the GDP growth rate slows, then this can be seen as a weakening economy and the currency is likely to depreciate.

Economic growth outlook

Growth outlooks give investors and traders guidance by providing an estimate of the future GDP. If growth outlook is reduced, the currency will fall; if growth outlook is raised, the value of the currency will appreciate.

Government agencies, as well as investment banks and economic think tanks, publish growth outlooks – an estimate of what they think the future GDP will be.

These provide a guidance to investors and traders on the future performance of a country’s economy. When estimates are made public, they also affect a currency value. Typically they estimate the GDP for one or two years into the future. If the growth outlook is reduced, this has a negative effect on the value of the currency. If growth outlook is raised, this has a positive effect.

Retail sales

Strong retail sales means consumers are confident in the economy and have more money to spend, therefore having a positive effect on the currency.

Consumer spending can account for a majority of an economy. If it does not account for the majority, it still generally makes up a substantial proportion of it, and so retail sales data is an important indicator. Retail sales measure the total amount of consumer spending in a given month across various sectors, such as electronic retailers, restaurants and car dealerships, to name a few.

Strong retail sales growth indicates that consumers are confident regarding the economy and that they have extra income to buy goods and services. An increase in retail sales therefore has a positive effect on the currency.

Home sales

Home sales rise and fall based on consumer confidence, mortgage rates and the general strength of the economy. A strong housing sector is therefore positive for the currency.

The housing market is one of the most visible signs of strong growth in the economy. Home sales are measured by:

  • New home sales
  • Pending home sales
  • Housing starts
  • Building permits

Each of these housing reports rise and fall based on consumer confidence, mortgage rates and the general strength of the economy. Housing figures show a clear sign of economic strength and so strong housing data is therefore positive for the currency.

Trade balance

The trade balance report compares the exports and imports of a country in a given period. A country will either have a trade surplus or a trade deficit. A trade deficit is when the imports of a nation exceed exports – a trade surplus is when the exports of a nation exceed its imports.

Imports and exports of cars to show currency strength

A trade deficit lowers the value of a currency because more foreign goods are being imported than exported. In order to do this, the local currency has to be exchanged into the currency of the country from where the goods originated.

A trade surplus will have a positive effect, because foreign currency is being converted to the domestic currency to purchase the domestic goods and services, thus increasing demand for the local currency.

The trade balance report gives details on the amount of imports and exports for a country over a given period. A trade deficit is negative for the value of a currency, while a trade surplus is positive for a currency.

A change in trade balance is just as important

An important point to note when considering the trade deficit or the surplus: If the figures change from the last published report, then this also has an influence on the currency. If a country actually increases its trade deficit, then the amount of currency converted to a foreign currency to buy the goods or services also increases.

This means that a trade deficit increase has more of an impact on the devaluation of a currency than just the report of the deficit alone. This is the opposite when a country increases its trade surplus.

Summary

So far you have learned that ...

  • ... unemployment rates are used to measure the percentage of the labour force that does not have a job, but is looking for employment. A higher level of employment has a negative effect on the value of a currency.
  • ... GDP measures the total produce of goods and services within a country. An increase in GDP will have a positive effect on the currency.
  • ... retail sales account for a significant proportion of the economy in many countries. An increase in retail sales results in a positive effect on the currency value.
  • ... the housing market is an important driver of the economy and is measured by new home sales, pending home sales, housing starts and building permits. An increase in any of these results in a positive effect on the currency.
  • ... trade balance measures the total imports and exports of a country. If a country has a trade deficit then this is likely to have a negative effect on the currency value.

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  • Probably CPI / inflation should be included here as it is one of the main drivers that influence central banks in lowering/rising interest rates
  • At the top of the page: "Low unemployment rates mean a strong economy".
    At Summary: "A higher level of employment has a negative effect on the value of a currency."
    Am I misunderstanding something, or it should be "higher level of unemployment rates has negative effect"?
  • I haven't finished all lessons in Forex Fundamentals but "WOW", what an insight.
    Thanks to Tradimo
  • Very nice your comment.
  • Did rockcityman88 ever get an answer to his question about "A higher level of employment has a negative effect on the value of a currency." as it confused me too.

    I also thought that it should have read UNemployment????

    Please clarify.

    Great information from this website, easy to understand, and i'm learning loads...

    Keep up the good work.
  • hi,
    were we can follow this report and the pre sentiment report ??
    thx in advance
  • Hi toujani,
    Best is to check out one of the large news agency websites like, CNBC, Reuters, Bloomberg. Regards.
    Peter
  • i want ask
    consumer price index measure the change in price of baskets of goods , so if the CPI increase that mean the prices increase which mean there is inflation expected , which is bad for currency , and in the calendar last week i see that CPI decrease and consider as bad for currency
    any explain ??!!! and thnx
  • I would say there's a narrow range of healthy inflation usually 2-3% that is desirable for stability and growth anything below or above that in a developed economy is either too low or too high!
  • ok so we have lower prices as we see in CPI and FED want raise interest rate , that make people have less money in hand and many will put money in bank , so we get lower demand
    and at same time companies will have less desire in borrow money and make invest cause high interest so we get lower supply or same previous supply
    right ??!!! what if company make lower supply ?? by fire employer ? or maybe high price encourage it to make more invest ? and thnx
  • I think both are true. If companies lay off due to lower demand that is a natural correction in economic activities. Higher interest on loans is only an issue if you can't make even higher returns. For example a loan with 2% interest rate where you only expect to make 1% after investing is a worse deal than a 4% loan if you can make a return of 6%!

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