Exchange rates often react favorably to wins by pro-growth or fiscally responsible parties. A referendum can also have a substantial impact on exchange rates. A good example is the Brexit vote, which had a dramatic effect on the British pound when the U.

voted to leave the EU. The fiscal and monetary policies of any government are the most critical factors in its economic decision making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or the future outlook of policymakers. Economic reports are the backbone of a forex trader's playbook.

Maintaining an economic report calendar is crucial to staying current in this fast-paced marketplace. Gross domestic product GDP may be the most visible economic statistic, as it is the baseline of a country's economic performance and strength. GDP measures the total output of goods and services produced within an economy. However, it is crucial to remember that GDP is a lagging indicator.

That means it reports on events and trends that have already occurred. Inflation is also a significant indicator, as it sends a signal of increasing price levels and falling purchasing power. However, inflation is a double-edged sword. Many view it as placing downward pressure on a currency due to retreating purchasing power. Inflation can also lead to currency appreciation, as it may force central bankers to increase rates to curb rising inflation levels.

Inflation is a hotly-contested issue among economists, and its effects on currencies are rarely straightforward. Employment levels, retail sales, manufacturing indexes, and capacity utilization also carry important information on the current and predicted strength of an economy and its currency. They can provide confirmation for the primary factors we've outlined above.

The forex market is ultimately driven by economic factors that impact the value and strength of a nation's currency. The economic outlook for a country has the most influence on the value of its currency. Knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex. Bank for International Settlements BIS. The John Deutsch Institute for the Study of Economic Policy at Queen's University.

Treasury Bonds. Company News Markets News Cryptocurrency News Personal Finance News Economic News Government News. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Macroeconomic statistics, such as inflation, have the greatest impact on forex markets. Stock, bond, commodity, and other capital markets also have a strong influence on exchange rates. International trade numbers, such as trade deficits and surpluses, play a vital role in forex markets. Political news can also be important for forex traders, especially when unexpected outcomes occur.

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Economic indicators can have a marked effect on Forex and CFD contracts for difference prices. Accordingly, many traders keep a sharp eye on the economic calendar, to ensure that they are abreast of any potential volatility bumps that lie in the road ahead. Around the world, various governmental and non-governmental agencies report on a regular basis, with certain pieces of economic information. The methods by which these reports are put together can vary considerably. Sometimes, the data is as direct as reporting monthly sales from a particular segment of the economy.

Others may not come from hard data, instead being based on opinions recorded within surveys. Still, others may derive their findings from extrapolating existing data. Some indicators will inform you about the current state of economy; while others may confirm what the economy previously did; and others may predict what is yet to come. This final set — known as leading economic indicators — are of particular interest to traders, as they offer the best insight into the likely trajectory of future economic activity.

The indicators that tell us about the current state of economy are called 'coincident'. Those that confirm what has already occurred are known as lagging indicators. The main difficulty for traders who are just starting out is knowing which are the important ones — those that are most likely to affect prices — and which ones are low-impact.

This knowledge is useful as there may be many economic indicators released in a single day, and it's not really realistically possible to keep an eye on them all. To try and help in this area, we have put together an explanatory list of Forex economic indicators.

In our economic indicators list we've included those that are considered to be the most important. All of these have the potential to exert a strong effect on the financial markets. As the US economy is the largest economy in the world, and wields some influence on the performance of financial markets globally, our list focuses on US reports, in an effort to provide you the best economic indicators. GDP is the widest measure of the overall health of an economy. It takes such a long time to compile that its direct effect on Forex and CFD prices is frequently muted — and by the time the data is published, many of the components are already known, and, therefore, expectations are often fairly accurate.

That being said, should the number come out markedly different to expectations, it still has the potential to move the market. Despite its lack of timeliness, it is still a very important indicator to understand because it is the single best measure used to confirm where we stand in the business cycle. The business cycle is a key concept in modern economics. It consists of an expansionary phase, whereby many areas of the economy grow at the same time, and a recessionary phase, when economic activity contracts.

Because the broadest gauge of economic activity is GDP, economists tend to determine where we are in the business cycle by looking at alternations of growth and contraction in GDP. The technical definition of a recession is two consecutive quarters of contraction in GDP. A recession ends as soon as we see a quarter of growth. Politicians, policymakers, and economic analysts all focus heavily on this indicator, precisely because it is such a comprehensive measure. Investment banks adopting a top-down approach to Forex analysis will start by making projections for the general economic climate.

GDP is a key part of this kind of analysis of foreign exchange market macroeconomics. As professional traders, we need to be aware of it is as well, but you should also be cognisant of the fact that because GDP is a lagging indicator, its main use is to confirm what we already expect. Its lack of timeliness means that its utility as a trading tool for short and medium-term trading is limited.

US GDP only comes out once a quarter, and even the earliest estimate reports back many months into the past. Very useful, therefore, would be something that can be used as a close proxy for GDP, but which reports more frequently — which brings us onto our next indicator.

The blue vertical line marks the release of the Employment Situation report that was released on 1 November Notice how sharply the price moved in just one minute? Also, notice how much larger the average range of each bar becomes after the release of the report, compared to before. Part of the answer lies in the timeliness of the report. The employment cycle and the business cycle are closely related and, historically, changes in nonfarm payrolls NFPs have moved along a very similar path to quarterly GDP changes.

This close correlation means that payroll data can be used as a proxy for GDP. The crucial difference between the two is that nonfarm payrolls come out monthly, reporting on the month that ended just a few days before. In contrast, GDP is reported quarterly, and with a big delay. Another part of the answer is the impact the report has on monetary policy. Maximum employment and stable prices are two of the FED's Federal Reserve Three Monetary Objectives these two key goals are often referred to as the FED's dual mandate.

It follows then that employment data can have a serious effect on market perceptions of the future direction of monetary policy. The unemployment rate is defined as the percentage of the labour force actively looking for work.

In periods of recovery, unemployment acts as a lagging indicator. We tend to see unemployment continuing to rise even after GDP has bottomed out. Unemployment is also closely tied to consumer sentiment see number five on our list.

Extended periods of unemployment are extremely damaging to consumer sentiment, and consequently also affect consumer spending and impact on economic growth. Just as with nonfarm payrolls above, unemployment data offers CFD traders insights into one of the key metrics followed by the FED. This means that any strong divergence from expectations are likely to have a big impact on Forex and stock markets.

All things being equal, US labour market weakness would conventionally be considered to be bearish for stock prices and for the US Dollar. If you want to make the most of economic announcements, like the US unemployment rate, getting an Admirals trading account is the perfect way to do that!

Trade the right way, open your live account now by clicking the banner below! The Federal Open Markets Committee FOMC meets eight times a year as part of its regular schedule to determine US monetary policy. The outcome of an FOMC meeting can markedly affect the Forex market, should there be any disparity from the expected course.

A key fundamental that drives Forex rates is the level of interest rates in the two countries involved, and the expectations regarding those interest rates. If the FED makes a change to the federal funds rate, or simply alters perceptions about the future course of monetary policy, it makes a difference to the US Dollar, the most important currency in the world. As part of the statement released after each FOMC meeting, the FED provides forward guidance about the expected path of monetary policy.

This is a reasonably recent measure, aimed at providing greater transparency as part of an effort to reduce volatility in financial markets. As a consequence, changes in monetary policy are usually communicated to some degree in advance.

This means that the forward guidance itself has the potential to move markets, just as much as an actual change in policy. A serious Forex or CFD trader will always ensure they are aware of the Calendar for FOMC Meetings. At number five in our list we have two reports. The Consumer Confidence Index, compiled by the Conference Board, and the Consumer Sentiment Index, is compiled by the University of Michigan. These reports are important because nothing drives the US economy quite like consumer spending.

Consumer confidence lets us know how consumers are feeling. If they're feeling secure in their jobs and are optimistic about their future economic prospects, what can we infer? It is logical to presume that they may be more inclined to go out and spend.

This will drive economic growth. Because consumer optimism or pessimism has such strong implications for the prospects of the economy, these two reports should be featured in any leading economic indicators list. The Consumer Confidence Index comes out toward the end of the month, while the University of Michigan publishes its survey twice a month.

This comprises a preliminary reading on the second to last Friday of the month. A final estimate follows two weeks later. These reports tend to have the most impact on the Forex and stock markets, when the business cycle is close to a turning point. Strong consumer sentiment points to a possible upturn for the economy going forward, which is bullish for stocks. Weak consumer sentiment presages a downtown, and is a bearish signal for the stock market. The University of Michigan survey comes out more frequently, which is useful.

The Conference Board's report samples a wider body of respondents, though, which implies greater statistical reliability. Both tend to correlate fairly well with turns in the business cycle, but they are heavily influenced by the labour market. If unemployment remains high when other parts of economy are recovering, market sentiment may remain depressed, thus behaving as a lagging indicator in such circumstances. The CPI measures the cost of goods and services, index-linked to a base starting point.

This provides us with an objective handle on how fast prices are rising or falling. As we mentioned earlier in the article, price stability is part of the FED's dual mandate. When inflation is within target levels, it is considered normal or even desirable.

However, if inflation veers too far off target for too long, it can have very negative effects on the economy. Economists at the FED prefer to focus on the PCE price index that comes as part of the GDP report. This is only reported quarterly, so Forex and CFD traders often follow the CPI as it is a more timely indicator of inflation.

The CPI's usefulness as a leading indicator for the economy is limited. It has proven to be a poor predictor of turning points in the business cycle, despite a natural and logical association between economic growth, demand, and higher prices.

In the s and early s, high inflation was a real issue for the US economy. In contrast, in the aftermath of the global financial crisis, there was a real danger of deflation sustained price decreases. Deflation hurts the economy by incentivising consumers to hold off making purchases because they will be cheaper in the future, so long as prices continue to fall.

As consumer spending constitutes such a large part of GDP, this will slow economic growth, and can create a vicious circle. Because inflation feeds into monetary policy so directly, the CPI report can have a high impact on prices in the bond , FX, and stock markets.

As usual, it is diversions from expected results that tend to have the highest impact. For example, if CPI comes in much higher than expected, it will alter the perceptions that the FED will be more likely to tighten monetary policy going forward. All things being equal, this should be bullish for the US Dollar. Similarly, a CFD trader might interpret such inflationary data as being bearish for the stock market, as tighter monetary policy tends to curtail risk appetite.

The forex market is primarily driven by overarching macroeconomic factors. That being said, should the number come out markedly different to expectations, it still has the potential to move the market. The blue vertical line marks the release of the Employment Situation report that was released on 1 November Dialog Heading. Inflation is a hotly-contested issue among economists, and its effects on currencies are rarely straightforward. Gazprom warned it will curb fuel traveling through Ukraine from November 28th, the last remaining pipeline still bringing Russian gas to western Europe.

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