There are certain economic indicators that traders should monitor in order to evaluate the strength of a country’s economic performance and thus its currency. Economic indicators and reports are released by governments and independent bodies that collect and analyse the relevant figures, providing the market with an indication of whether an economy has improved or declined. Traders pay close attention to the latest results of each report, as well as to any changes to the results from the previously published report, as they have a direct effect on the value of a country’s currency.
As a serious Forex trader, it is essential to keep track of the pulse of the economy by looking at major indicators. This article will look at some of the most significant economic indicators and reports that traders around the world monitor.
Probably the most crucial indicator of the health of an economy is employment. As consumers account for approximately 70-80% of a country’s economic activity, the status of the labour market is of vital significance to the general strength of the economy. If employment is declining, the economy could weaken, as fewer people will be able to buy non-essential goods. If employment trends upwards, then spending and economy will rise, thus leading to a stronger currency. The key principal is that more people working, means more disposable income, which leads to higher personal consumption and gross domestic product.
On the first Friday of each month, the U.S. Bureau of Labor Statistics releases its unemployment and non-farm payroll reports. These reports show the existing unemployment rate and the total number of paid workers, as well as how many jobs have been added or lost by the U.S. economy, respectively. Another important indication of employment is the weekly jobless claims report that shows the number of first-time filings for unemployment benefits nationwide. Investors eagerly look forward to these reports, as they often result in some of the largest one-day movements in financial markets.
The mandate of all central banks is to stimulate economic growth and price stability in the country’s economy. Price stability is gauged as the rate of inflation. High inflation results in an increased discount rate and consequent lower projected value. Deflation is also risky, as reduced income means possible dismissals for companies, as they cannot retain their full personnel. Forex traders closely monitor monthly inflation reports in order to determine the future course of monetary policies among large economies.
There are many indicators of inflation, but possibly the most prominent is the Consumer Price Index (CPI). The CPI gauges the fluctuations in consumer prices and determines to what level life is becoming pricier for the average consumer. A CPI that is rising month after month could be an indication that inflation is corroding purchasing power to the point that the central bank is likely to increase interest rates to curtail spending. A rise in interest rates may result in the rise in demand for a currency, as the probability for a higher yield renders the currency more attractive to traders.
Another important indicator is the Producer Price Index (PPI). PPI rate fluctuations gauge the change in inflation rates for producer goods. In general, if the producer goods prices rise considerably, it is likely that companies will ultimately pass the price increases on to consumers. Moreover, increasing PPI could signal a surge in interest rates in order to fight inflation.
Investors, also, observe the price of major commodities, such as oil. Since oil is an essential element of the worldwide economic activity, the fluctuations of its price is worth paying attention to. Increased oil prices may result in higher prices for many goods, as oil is a component of numerous materials and a major determinant in the cost of transporting goods.
Changes in consumer activity directly affect corporate profits and stock prices. One of the most prominent methods to assess consumer activity is to measure consumer confidence. There are various ways of measuring consumer confidence, which are all designed to evaluate how consumers feel about the economic outlook in the months to come. The rule of thumb is that when people feel more confident, they are more likely to purchase non-essential goods. Equally, they are less likely to purchase non-essential goods, when they feel less confident. Due to the fact that markets are future oriented, there is a tendency for stock prices to mirror the future sentiments of consumers today.
One of the main indicators of consumer activity is retail sales. Retail sales report calculates the total receipts from a diverse sample of retail shops in a country. The specific report is highly regarded as a timely indicator of general consumer spending patterns, adjusted according to seasonal variables. A strong retail sales report shows overall growth in the economy, hence leading to greater demand for a currency. Moreover, it is used to forecast the performance of other lagging indicators and to evaluate the current direction of the performance of the economy. Retail sales revisions often cause high volatility in financial markets.
Another important indicator of consumer activity is the housing market. Traders monitor monthly releases regarding this market, such as housing starts, building permits, housing completions and new home sales to assess the level of activity in the housing market. By looking at a variety of housing reports, investors can comprehend whether or not people are willing to conduct large purchases. Moreover, individuals purchasing new homes tend to spend money on other goods, such as furniture, home appliances and garden supplies. It is notable, that the housing market is the first to show signs of stagnation, after rate hikes by central banks. This is due to the fact that increasing mortgage rates may be enough for homebuilders to slow down on new housing starts.
Keep track of major indicators
Understanding the relationship between the performance of an economy and its currency value, can allow a Forex trader to assess the demand and a possible rise or decline in the value of a currency pair. Here are some best practices to help you keep in line with the economic indicators that affect a currency:
- Regularly consult an economic calendar that lists the indicators and when they are due to be released. Also, anticipate future indicators, as markets often move in expectation of a particular indicator to be released at a later stage.
- Be aware of the economic indicators that get most of the market’s attention at any given time. Such indicators affect the largest price and volume movements.
- Keep track of the market forecasts for the data and focus on whether the forecasts are met. Occasionally, there is important difference between the market expectations and the actual figures.
- Do not trade too quickly on the data released. Often figures are revised and things can change quickly. Pay attention to these revisions, as they may help you react more accurately to future reports.
Energy stocks drag down FTSE 100, IG Group slides
By Shivani Kumaresan
(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.
The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.
Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]
“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.
“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.
British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.
IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.
Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.
Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
Miners lead FTSE 100 higher on earnings cheer
By Shivani Kumaresan
(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.
BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.
Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.
“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.
The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.
Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.
Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.
WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)
Top 8 Tax Scams to Watch Out For
It is tax time and that means finding the best way to file your taxes and to get a refund...
CEO Hisham Itani and Resource Group Recognized in the 2020 Global Banking & Finance Awards®
Global Banking & Finance Review has awarded Hisham Itani the Chairman and CEO of Resource Group, Technology CEO of the...
Euro zone business activity shrank in January as lockdowns hit services
By Jonathan Cable LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to...
Volkswagen’s profit halves, but deliveries recovering
BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car...
Global chip shortage hits China’s bitcoin mining sector
By Samuel Shen and Alun John SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines...
Iran’s oil exports rise ‘significantly’ despite sanctions, minister says
DUBAI/LONDON (Reuters) – Iran’s oil exports have climbed in recent months and its sales of petroleum products to foreign buyers...
Nissan to source more UK batteries as part of Brexit deal ‘opportunity’
By Costas Pitas LONDON (Reuters) – Nissan will source more batteries from Britain to avoid tariffs on electric cars after...
Muted recovery for UK retailers in December ends worst year on record
By David Milliken and Andy Bruce LONDON (Reuters) – British retailers struggled to recover in December from a partial coronavirus...
Chinese phone maker Honor partners with key chip suppliers after Huawei split
By David Kirton SHENZHEN, China (Reuters) – Chinese budget phone maker Honor said on Friday it had signed partnerships with...
Oil down $1 as China COVID-19 cases trigger clampdowns
By Noah Browning LONDON (Reuters) – Oil prices fell on Friday, retreating further from 11-month highs hit last week, weighed...