Trading currencies has become a lucrative endeavour for traders who are skilled in observing and interpreting the dynamics that influence both local and global currency rates. This is where economic indicators come in. Investors follow and keep watch over economic indicators to speculate the movement of securities in the foreseeable future, providing them with the best trading opportunities.
Notably, central banks across the world, such as the Bank of England scrutinize multiple components of economic data, which are the indicators, to establish the health of the country’s financial stability. This article highlights the various types of economic metrics and how professional traders follow them up to generate profits.
What are the Economic Indicators?
Economic indicators get defined as statistical data on a country’s economic activities. These indicators are released by governmental or non-governmental agencies periodically (often monthly). The Office of National Statistics (ONS) is responsible for the publishing of these indicators in the UK. Different methods are employed to put together such economic datasets, including surveys, and sales data.
However, information on a country’s economic activities may not always get derived from hard data. Instead, extrapolation of existing data may be applied to source such information. Also, the indicators vary from each other on the parameter of the target audience, origin, and impact on the current financial markets.
What are the 5 Key Economic Indicators?
The data that significantly impacts forex falls into five key categorizations.
1. Gross Domestic Product (GDP) Growth
The GDP of a country is a leading indicator of all the other economic datasets. Generally, GDP growth is a measure of the rate at which a state is contracting or growing economically in each period, making it one of the broadest measures of a country’s economic status. GDP is the total value of all the products (goods and services) made by a state in a specified timeframe.
For example, the UK’s GDP in 2019 estimated at 2.21 trillion GBP, which was an increase from the 2018 value of 2.11 trillion GBP
2. Inflation Measures
Every month, ONS publishes information on the Producer Price Index and Consumer Price Index (CPI). These two indices reflect a country’s inflation at the producer and consumer levels, respectively.
CPI indicates changes in the prices of products purchased by consumers over time. On the other hand, the Producer Price Index is an indicator of what manufacturers receive for the release of their products. The UK government uses these indices, especially CPI, to measure their inflation targets.
3. Labor Market Statistics (LMS)
This metric comprises of datasets displaying net changes in economic aspects, such as unemployment rate, employment levels, labour productivity, and economic inactivity. The LMS report reflects the status of the UK population over a given period.
4. Household Expenditure
The Household Expenditure indicator reflects the value of the contribution that households make towards UK’s economic growth. This report is given both in volume terms and current prices.
These two measurements are adjusted for inflation, displaying a clear picture of the many goods and services households are purchasing.
5. Balance Trade
This refers to the difference in the value of a country’s exports and imports. When the value of imports exceeds that of the exports, then the government is said to be in a trade deficit, which creates a downward trend in the cost of a country’s currency.
On the other hand, when there are more exports than the imports, the country is said to be in a trade surplus. Trade surplus often results in economic growth, pushing the country’s currency to the upside.
For example, in 2015, the UK’s trade deficit was 4.1 billion GBP. This followed an increase in import value by 2.3 billion GBP within the same year.
What is a Macroeconomic Indicator?
A macroeconomic indicator gets defined as a dataset, statistics, or data release that reflects the economic output or production of a country or sector.
These indicators are often on a large scale, which governments and traders follow up to establish the country’s economic growth currently and in the future.
There are two primary categories of macroeconomics indicators, including the following;
- Lagging Indicators
These indicators are used to show the historical performance of a country economically. Lagging indicators only change after the occurrence of a trend.
- Leading Indicators
A leading indicator is used to show the direction towards which an economy is headed.
What are the 5 Key Macroeconomic Indicators?
- Stock Market
The stock marketplace is a leading indicator that governments and agencies follow up to establish the health of a country’s economics. This is because stock investors actively assess and follow up the economic stimulus and stability of companies for informed speculation of stock prices.
Growth in the stock marketplace shows the confidence of investors in the future of a business or company, resulting in economic growth.
A fall in the stock marketplace, on the other hand, could imply that investors are withdrawing money out of their stocks out of no confidence in the stock marketplace.
- Interest Rates
Central banks in major economies follow movements in the marketplace or the occurrence of an economic event to decide on the direction of a country’s rates of interest. This is probably one of the most fundamental metrics that forex traders use to establish the stability of a currency.
An increase in the rates of interest attracts foreign investment, leading to a spike in the value of a currency. A fall in the rates of interest, on the other hand, lowers the demand for a currency.
3. Retail Sales
This indicator is used to show the total purchases made by every business and consumer in the country with respect to the retail sector. When retail sales improve, the country is said to be improving, resulting in the stability of a country’s currency. If every business or consumer is confident of the country’s economic circumstances, then they will continue to spend money on necessities and products that are not necessities.
- Bond Yields
This metric is one of the most considered leading indicators, reflecting the expectations of traders and investors on the future economic circumstances of the country.
- Housing Metric
This metric measures the changes in the cost of residential housing relative to the specified start date.