Forex and CFD prices are affected by some specific macroeconomic indicators. In the course of forex trading, forex traders are always keen to take note of any news on economic indicators to help them make maximum profit. They can keep an eye on the economic calendar and use these economic indicators to ensure that they stay up on any volatility in the market.
The economic stability of any individual nation is closely tied to its foreign exchange market and currency. Any fluctuations in the value and strength of currency are therefore reflective of the country’s current economic status, whilst various economic indicators are indicative of a country’s economic situation. While some of them inform potential investors of the country’s current state of the economy, others give insight into what the economy is likely to look like in the future.
Interest Rates
Any forex trader with the drive to succeed is likely to keep an eye on interest rates. Interest rates determine the profit margin such that an increase in interest rates is likely to lead to an increase in profit margin. The central bank is in charge of adjustment of the interest rates on currency as per the prevailing economic conditions of the nation. An increase in interest rates by the central bank would, therefore, mean that there is inflation and this is an effort to cut down this inflation.
A decrease in interest rates, on the other hand, would mean that there is enough money in circulation and therefore enough to lend. To encourage lending the interest rates have to be lowered. One would, therefore, be able to tell the position the government holds on the prevailing economic situation at any particular time. An upward curve in things such as employment is likely to lead to raised interest rates and a downward curve in the same is likely to lead to lowered interest rates by the central bank. It is therefore clear that from whichever direction the interest rates shift to, the forex trader can gain insight into how the currency market is likely to be shaped. Forex traders are therefore advised to invest in those currencies with higher interest rates for maximum profits.
Inflation
Traders who are quite dynamic in the forex market should be prudent enough to keep an eye on the inflation index. Disproportionate rise or fall in the money supply can result in inflation. When excess money is in circulation in the economy inflation is likely to be triggered since the prices of goods and services will automatically rise. To control this, central banks increase interest rates whenever there is inflation. When it comes to foreign markets, the trade of currencies takes place in pairs. Inflation in one currency may not have the same effect as inflation in another currency. The aspect of inflation should, therefore, be considered in its entirety rather than in isolation of individual currencies.
Gross Domestic Product
Data on the gross domestic product of a nation affects its currency market. It is one of the direct indicators of a nation’s economic success. When a country’s economy is growing this is shown by a rise in the gross domestic product. Conversely, a reduction in a country’s gross domestic product signifies economic instability.
The best way to understand a nation’s standing in the business cycle is through its gross domestic product. In economics, the business cycle has two phases namely expansionary and recessionary phase. During the expansionary phase, the economy is growing while during the recessionary phase the economy is failing. GDP remains a key part of the analysis of the macroeconomics of the forex market. Traders should, therefore, use the data they obtain from GDP to assess which currencies to trade in and which ones do not.
Capital Flow
The amount of capital that flows into a nation determines the rates at which its currency is being sold in the market. Among the various ways that capital may flow into a nation, international trade is the most important. The currency rates are likely to fall when a countries expenditure on international trade (imports) exceeds their earnings (exports). The reverse happens when exports are more than imports. From the currency value of a nation, investors in the forex market can know its prevailing economic conditions and also predict how the economy would look like soon. Such information is very crucial to forex traders since they can incorporate this in their live forex calendar and plan when to trade a particular currency.
It is clear that without economic indicators forex trading would be like a blind sport. To come up with better trading strategies in 2019, forex traders will, therefore, have to be on the lookout for anything that can enable them to predict the economy accurately.
