The economy is the most important fundamental indicator of Forex trading. However, economical analysis for Forex trading is very different than with other trading, like the stock market. With stocks, you can simply look at the values of the company’s assets and the flow of funds. With Forex trading, you must look at all the numerous factors which influence a local and global economy. Here are the core economical factors which must be analyzed for Forex trading.
Retail Sales Reports
The retail sales reports of a country (or region) can give you insight about the resident’s spending powers. These reports will tell you the total amount spent in retail stores throughout that country. High sales are an indicator of a strong economy which will likely have a surging currency.
When a country’s interest rates go up, it becomes more attractive to investors because they get a high rate of return. This leads to a stronger currency because of the increased investment. However, raises in interest rate can also cause the currency to go down because it may reduce the purchase power of the country’s residents. Thus, interest rates must be weighed against the purchase power of the country.
Gross domestic product refers to the total dollar amount of all of the goods and services produced in a country during a specific period. The GDP is the main indicator of how healthy a country is financially. Usually, GDP is referred to in percentages of how much it has increased or decreased from the previous period (usually the year or quarter). A very simple way of calculating GDP is either totaling all of the nation’s income or all of the nation’s expenditures. A more advanced method of calculating GDP is:
GDD= (customer expenditures) + (business investment capital) + (governmental expense on all goods/services) + (gross export – gross import)
A nation’s unemployment rate is highly indicative of its economical health. A high unemployment rate is also likely to affect the retail sales reports as well.
Economical Analysis Does Not Exist in a Vacuum
While these economical aspects can help predict Forex trading, traders must always be aware of the larger picture. The economy of a nation can quickly change based on other fundamental aspects, such as a natural disaster or changes to government policies. But just looking at fundamental policies is also unwise because nations typically follow trends. For example, a tsunami in a country could cause its economy to falter for some time but, over the long run, the technical analysis may be correct in that the nation’s currency will stabilize.