What are Economic Indicators?
There are a number of economic indicators that offer statistical information about a countries economic activity. Used mostly as a ‘pre-view’ of sorts to establish performance, patterns and prediction on future performance within an economy, such as a business cycle.
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Types of Economic Indicators
The indicators’ frequencies vary from one indicator to the other; some are daily, others monthly and several are quarterly. Before the indicator occurs there are speculations made by leading financial figures, and traders base their moves on those speculations. An economic event has a double influence; first when announced, and second when compared to the speculations made before. A big difference between the speculation and the actual number can cause shifts in the market.
Examples of economic indicators include:
- Unemployment rate
- Interest rates
- New building permits
- Federal funds rate
- Changes in the Gross Domestic Product (GDP)
- Consumer Price Index (Inflation)
- Currency Strength
- Corporate Profits
- Balance of Trade
Each indicator can affect more than its own market. For instance, if a government issued a statement that more building permits were given, it will result with more jobs, lowering the unemployed rate and thus leading to higher consumption rate and ending with the strengthening of the local currency.
Economic Indicator Examples
An example for an indicator with a major impact is the Non-Farm Payrolls (NFP), published on a month’s first Friday by the U.S. Bureau of Labor Statistics. This report reveals the unemployed rate in the US, except government, farm and non-profit workers. That covers some 80% of the US working force. A decrease in the unemployed rate, i.e. there are more people working, usually indicates the market is growing. As a result the American Dollar will grow stronger. If a trader speculated that beforehand, and opened buying positions prior to the announcement – the outcomes would be to his favour. Naturally, if the unemployed rate rises the Dollar will weaken. Either way, the NFP and the speculations beforehand will cause vibrations in different instruments.
The most recent Euro centric example would be the ECB Interest Rate Decision, that is announced by the European Central Bank. If the ECB are hawkish about the inflationary outlook of the European economy and they raise the interest rates, it is seen as a positive sign for the EUR and the trend would be on a bullish curve. The opposite would be true for the ECB if they keep the current interest rate going, or they decide to cut the interest rate the EUR will suffer and be on a bearish trend. Should the outcome of the indicator be as expected the EUR will not see much impact, however if the predicted outcome is not as expected the element of ‘surprise’ will have the greater market impact.
The Caixin Purchasing Managers’ Index (PMI) is a specific measurement of nationwide manufacturing activity, where attention is given to smaller and medium-sized companies. The news came in during the December 2015 announcement, that this month’s PMI came in lower than the expected figure. The general fear is that, as a result, manufacturers continue to cut on their staff numbers in turn lowering their production output.
Other types of Economic Indicator review market growth demand and supply figures and many other factors that impact markets, instruments, companies and traders as one.
The Importance of an Economic Calendar
The key to the success for most traders is a frequently updated economic calendar. The calendar covers all important events and releases that affect the forex trading markets as well as the economy of a specific country. A great understanding of why markets do what they do, can be found on these calendars while traders are able to anticipate market moves based on previous, actual and forecasted numbers. With the release of key economic data such as NFP, GDP, etc figures present excellent trading opportunities.
How to use Economic Indicators?
In order to utilize the indicators to one’s advantage, a proper market analysis is required. Some traders prefer a more elementary research, while others choose a very thorough work and analyses. For all traders the indicators can be a very useful tool requiring close monitoring of the economic calendar. Once the trader knows that a certain event is due to take place, e.g. a country’s consumer supply and demand rate, he will prepare by making a speculation on the number that will be presented. Based on that speculation the trader will choose which instrument to trade and if he should open a buy or sell position. Should the trader be accurate the trade can result with substantial profits.
Speculation made on Economic Indicators should be done with a knowledge of relevant markets and financial occurrences, or general events that can affect the content of the indicator. Once knowing all the related factors, the speculation will be based on a firm ground of rational thinking.
Putting Economic Indicators to Work
Any trader, beginner trader or experienced, should familiarise himself with the economic calendar, and learn which indicators are relevant to his trades and how. Once this information is acquired traders will find out how their trades become more successful and their earnings can surpass their expectation.
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All of the recent and soon to be released economic indicators from the Euro zone. All the indicators explained so you can make informed decisions in your Forex & CFD trading.
Euro Zone Balance of Trade – Balance of trade refers to the net imports and exports of the Euro zone. Typically a trade surplus is seen due to the large exports of manufactured goods. A strong trade surplus is a positive for the Euro and for European equity markets.
Euro Zone Composite PMI – The Markit Composite PMI reading tracks a number of business trends in both manufacturing and service industries. A reading above 50 means business activity is expanding and a reading under 50 means business activity is contracting.
Euro Zone GDP Growth – Euro zone GDP measures the total output of all 19 member states. Household consumption makes up for over half the GDP reading on the expenditure side of things. Exports account for 47% of GDP and imports account for 43%. It isn’t only the GDP reading that’s important, but also its change over time as a rising GDP indicates growing economic strength.
Euro Zone Interest Rate – The benchmark interest rate is the main refinancing rate for banks and is set by the European Central Bank. Higher rates (in comparison to other governments) will lead to a stronger currency, while lower rates typically lead to a weaker currency.
The Asian and Pacific Rim has become a zone of interest to investors in the Forex, Equity and Commodities markets. Here is a list of indicators of note in the region for successful CFD trading. Note that most of these are for China, since it has a larger economic impact on the rest of the world than the smaller economies of Japan, South Korea, Australia and the other countries of the region.
Balance of Trade – China has consistently run a trade surplus since 1995 as it is the manufacturing hub for the world. That trade surplus grew to $421.9 billion in 2019, but has since faltered due to the global pandemic. Investors also watch the import side of this number as it can indicate the growth or contraction of domestic Chinese demand.
China GDP Growth – As the fastest growing major economy in the world the GDP growth in China has been closely monitored. It is also considered by some as a proxy for global growth since China is so heavily involved in exports. Good Chinese GDP growth can help lift crude oil and other commodities, as well as shares of material and industrial companies. Caixin Composite PMI – This is a measure of the business trends in the private sector and it tracks variables such as sales, new orders, employment, inventories and prices. A reading above 50 indicates growth, while a reading below 50 indicates contraction. Japan GDP Growth – As the fourth largest economy in the world, the GDP growth in Japan is an important metric for investors, particularly those interested in trading the Yen. As a fully developed economy, services account for around 62% of GDP, with wholesale and retail trade as well as real estate accounting for much of that. Manufacturing also accounts for 22% of GDP.
Australia GDP Growth – While 65% of Australia’s GDP is based on its service industry, in recent years its economic success and the value of the Australian dollar has been closely tied to the success of its mining, natural resource, and agriculture sectors. Exports of raw materials, especially to China, has become the engine of growth for Australia and that means the fortunes of Australia are tied to Chinese growth.
There are a number of Economic Indicators out of the United States. After all, this is the world’s largest economy. Here are some of the most widely watched indicators you must be aware of for you to succeed.
Non-Farm Payrolls (NFP) – This measures the number of people (not including government, non-profit, and farm workers) who entered and exited the workforce. It is a closely watched indicator by traders in all markets because it is highly indicative of the growing strength or weakness of the U.S. economy. It can impact currency rates, commodities like gold and oil, and equity markets.
Unemployment Rate – Closely related to the NFP this gives a percentage of the labour force currently seeking work but unable to find it. Unemployment can affect all asset classes because of its broad impact on the health of the consumer.
GDP Growth Rate – Like any other nation the growth or contraction in GDP is a critical measurement of the strength or weakness of the overall economy. Historically the U.S. GDP has been trending lower since the 1950s when it was over 4%. Over the past ten years however the average GDP growth has been under 2%.
Housing Starts – This is a measure of the number of new residential housing projects started in the prior month. It includes structures being totally rebuilt on an existing foundation. The report also includes building permits and housing completions. Because housing is a key part of the U.S. economy this reading can show strength or weakness across broad areas of the economy including employment, construction, manufacturing, banking, and of course real estate.
Interest rates – In the U.S. interest rate policy is set by the Federal Reserve Bank. They use interest rates as one way of controlling inflation. Interest rates can also be used to stimulate the economy as businesses and consumers are more likely to borrow when interest rates are low. Conversely a low interest rate will often lead to a weaker U.S. dollar, and a rising interest rate can help to strengthen the U.S. dollar.
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