Economic or financial indicators are responsible for determining how a country’s economy compares. They measure specific sectors of an economy, for example, GDP, inflation, interest rate, and housing, among others. Traders are always watching these indicators in order to analyze the behavior of currencies in the Forex market and make successful trades.
Below we will explain the 3 most important economic indicators that you should take into account when trading online:
Interest Rates
Interest rates are one of the most important indicators to keep in mind when you are trading in the Forex markets. This indicator is set and used solely by the central bank of the country in question and works to manage the economy, either by raising the interest rate to lower inflation or lowering the interest rate to promote growth in the economy.
How do interest rates affect currencies?
A high interest rate means that the economy of the country in question is strong and this measure will allow a higher return to be earned on the capital in bank accounts. So, investors are more likely to decide to move their capital to countries that have a higher interest rate, because they are likely to get a higher rate of return for holding their capital there.
Also, keep in mind that when a central bank decides to increase interest rates, it automatically increases the demand for that country’s currency and therefore, its value increases (this happens as long as the economic circumstances are normal).
Inflation
The inflation rate is responsible for measuring the variation in the prices of goods and services in a given period of time. A dramatic increase in the inflation rate means that prices are rising faster, so people will buy fewer goods with the same money. If the inflation rate falls, the prices of goods and services will continue to rise, but at a slower rate.
An acceptable level of inflation for an emerging economy is between 3% and 5%.
To protect consumers from inflation, central banks usually decide to raise interest rates. This is because a high interest rate reduces the spending power of consumers and therefore the prices of goods and services decrease under reduced demand.
How do inflation rates affect currencies?
When inflation is higher than expected, investors may buy a country’s currency predicting that it will raise its interest rate, which means that the currency will quickly recover its value. This applies as long as we are talking about common circumstances in the economy.
GDP (Gross Domestic Product)
Gross domestic product (GDP) is an economic indicator that reflects the monetary value of all goods and services produced in a country. This indicator is used to measure the wealth generated by a country. ine easily and effectively.
GDP is responsible for measuring the total production of goods and services of a country, so its calculation is a bit complex. We have to know all the final goods and services that the country has produced and add them up.
A country is said to be growing economically when the rate of change of GDP increases, i.e. the GDP of the calculated year is higher than that of the previous year.
How does GDP affect foreign exchange?
When a country’s GDP increases, it is a sign that the economy is growing, and factors such as consumption and foreign investment strengthen the country’s currency, therefore, a good result in GDP will allow traders who operate in markets such as Forex to make projected future investments in that currency.
The three indicators explained in the article are the most common and always have a considerable influence on the value of assets. However, in the world economic market, there is a wide list of financial indicators that positively or negatively affect stock market operations. All indicators are tasked with measuring the strength or weakness of a given economy, so whether you are a forex trader or a bond trader, economic indicators will play a key role in your day-to-day trading.
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