4-GDP growth rate
The Gross Domestic Product (GDP) is one of the most crucial indicators to determine the health of a nation’s economy.
The GDP represents the value of all finished products and services produced by a country, usually on an annual basis.
The forex market usually looks at the percentage change in GDP on a quarter-to-quarter basis.
If the annual increase in GDP is at 3.0% – 3.5%, it indicates a healthy economy.
If the rate is higher, it can be a signal that excessive inflation is forming.
A smaller rate and a declining rate in general signals an economic downturn with decreasing demand from consumers and rising unemployment.
If the GDP growth is negative for 6 months, it is considered a sign of a recession.
For example, if the European GDP rate is released and the number is higher than forecast, this would generally drive the value of euro higher. Conversely, if the number comes out lower than forecasted, it will most often affect the euro rate negatively.
The employment statistics are usually reported as “unemployment rate“.
It measures the total workforce of a nation that was unemployed during the previous month. the unemployment rate can have a sharp effect on currency rates, especially if the results differ substantially from the numbers the analysts were expecting.
If the actual unemployment rate is lower than forecasted, it is good for the currency and vice versa.
Trader balance is the difference between the exported and imported goods and services during the reported period.
When exports exceed imports, it is called a trade surplus, which is a good sign for the currency.
Trade surplus means that other countries are buying products and creating demand for the local currency.
When the imports exceed exports, it is called a trade deficit and that is bad for the local currency.
Trade deficit means that there is a big demand for foreign goods, which are purchased with foreign currency thus strengthening that foreign currency and weakening the local one.
Political events can have dramatic effects on the currency rates. The most significant political events are elections, referendums and different scandals.
If a country has an unstable political environment, the value of its currency will tend to decrease as investors and forex traders try to avoid uncertainty.
Elections usually create uncertainty about the future of a country. When the leaders of a country change, it often comes with a different approach to fiscal (taxes and government spending) and monetary (interest rates, bank reserve settings) policy, currency rates.
In the case of upcoming elections, forex traders keep an eye on the pre-election polls to get an idea of the possible scenarios. If the upcoming leader is seen as economically responsible, then the currency rate will appreciate, as traders will go long on the currency.
On the other hand, if the polls show majority support for a person who is seen as a threat to the economy, the currency value will decrease as traders and investors will sell out the currency.
Lately, referendums have become quite popular, creating opportunities for currency traders to profit from them. Here are some examples of referendums with global impact:
● Will Scotland be independent from the United Kingdom?
● Should Greece accept the bailout from Europe?
● Should the United Kingdom leave the European Union?
When the preparation for the referendum about Scotland’s independence started, it decreased the value of the pound. The pre-referendum polls showed close results; therefore, investors started selling their pound assets fearing that the UK’s economy would suffer if Scotland separated. This was a good opportunity for Forex traders to go long on EUR/GBP as the euro rose against pound till the very day of referendum.
When a corruption scandal erupts at the government level, it can impact the economy of the country either by sparking protests, work stoppages or even unexpected elections. Even if there is a chance that the protests may result in improvements to the political and economic situation, the mere instability of such events negatively impacts the currency rate of the country.