11.2 What Data Points Should You Use for Trading?

Additional Reading About What is Risk Capital

Economic Data Releases - Text Version

Economic Data Releases

In the previous lesson, we talked about how fundamental analysis involves looking at key items of economic data for the currency’s country which you are analyzing. New data are typically released monthly by government agencies. In this lesson, we are going to outline what those key items are and what they represent.

GDP – Gross Domestic Product

This is a very important indicator. It shows the rate of growth (if positive) or shrinkage (if negative) of an entire economy. The headline rate which is usually given is an annualized rate which is extrapolated from the most recent quarter-year. It is more common for an economy to grow than to shrink. A recession is defined as two consecutive quarters of declining GDP.

Generally, GDP growth makes a currency stronger, while a decline in GDP makes a currency weaker. You can compare it to the effect a company’s announced profit or loss is likely to have on its share price.

Inflation

Inflation is the rate of increase (or possibly decrease) in the price of a representative basket of goods and services. It is often known as CPI (Consumer Price Index) or as RPI (Retail Price Index). The rate of inflation, in a very real sense, tells you how quickly the real value of a country’s currency is changing – and usually, that means going down! For example, if country A has an inflation rate of 2%, and country B has one of 3%, then it implies that the currency of country A should increase in value against the currency of country B. Higher inflation usually means a weaker currency, but it is not always that simple, as higher inflation can make a country’s central bank raise its interest rate, which often has the effect of strengthening a country’s currency. So, inflation can be a paradox.

Interest Rates

 A country’s central bank will typically decide what that country’s interest rate will be once per month. Their decision will depend on how the economy is performing. If a country’s economy is weak with very low or even negative growth, interest rates will tend to be cut, whereas if an economy is very strong and in danger of “overheating”, central banks will tend to raise rates to “cool” the economy. The more expensive it is to borrow, typically, the more of a drag this is on economic growth and the value of a country’s stock market. On the other hand, there is evidence that in the short term, currencies with relatively high interest rates tend to rise in value against currencies with lower interest rates.

Retail Sales

Retail sales data shows the value of goods and services which the general public is buying. It is a measure of the level of consumption in an economy and tends to reflect whether an economy is hot or cold. It does not necessarily follow that lower consumption means an economy is in trouble – people might be saving more. Generally, retail sales data provides an indication of how confident people feel financially, and of whether the economy generally has a willing and able market for its products. Extremely strong retail sales data can point towards an interest rate hike, and very weak data, towards a cut.

Labor Market

There are typically several items of data falling under this heading, most notably the unemployment rate, which tells you what percentage of the potential workforce is jobless. Some countries also release data about exactly how many new jobs were added, and this is another metric that can be used to add color to the headline unemployment rate. Finally, average earnings data might also be available, which shows whether average salaries are rising or falling, and by how much.

Labor market data is mostly useful in determining whether an economy is operating at “full capacity”, which would suggest an interest rate hike is required, or “under capacity”, which would point towards a rate cut.

That covers the most important economic data releases which traders should know about. You can find them simply by looking at an economic calendar, which shows all major scheduled releases. In our next lesson, we are going to look at the role of central banks in conducting monetary policy, an analysis of which is a very important part of Forex fundamental analysis.