How Macro-Economics Affects Forex?


As the prefix “macro” in the name suggests, macroeconomics deals with the bigger picture. It is not only one specific economy that traders consider, but the implications in the overall global picture. Forex market is primarily driven by overarching macroeconomic factors. These factors influence a trader's decisions and ultimately determine the value of a currency at any given point in time.

GDP- Gross Domestic Product

This is the measurement for goods and services that were finished over a period of time. GDP may be the most obvious economic report, as it is the baseline of a country's economic performance and strength.

The GDP is broken down into 4 categories:

  1. Business Spending

  2. Government Spending

  3. Private Consumption

  4. Total Net Exports

Inflation

Inflation is also a very important indicator, as it sends a signal of increasing price levels and falling purchasing power. This is the measure of increases or decreases in pricing levels over a period of time. Due to the immense number of goods and services available in a country, usually a grouping of these goods and services are used to measure changes in the pricing. Increases in pricing indicate an increase in the inflation rate which in turn can devalue that country's currency.

Interest Rates

This is always a major focus in the forex market. Since the central banks mandate monetary policy and supply, they are the prime focus of investors and the various market participants.

An increase in interest rates is a good sign for investors as the currency rate increases due to the increased interest rate for the currency.

Employment Data

Every country releases employment rates periodically. This is another indication of how well the economy is doing. A high unemployment rate means the economy is not growing in line with the population of if the economy has stagnated.

How it relates to forex market trading: A high unemployment rate could lead to a depreciation in the currency value and thus decrease the forex rate of that currency.

Non-farm payrolls (NFP) is the name given to the data that pertains to the number of people who are employed within the US economy, and it is released the first Friday of every month by the Bureau of Labor Statistics. Strong decreases in employment indicate a contracting economy, while strong increases are perceived indicators of a prosperous economy.

Terms of Trades

Terms of Trade can be addressed as the ratio of Export Prices To Import Prices. If the country’s terms of trade are large, ie they have more exports than imports, the currency will always appreciate and there will be demand for it. This means its currency value will be greater than another country whose Terms of trade are lower in comparison.

How it relates to forex market trading: An investor may like to invest in a country whose exports are greater than their imports.

Capital Flow

Currency values can be significantly impacted by monetary flows that result from certain interactions between countries. When imports exceed exports, there is a tendency for the currency value to decline. Increased investments in a country can lead to the opposite result.

Retail Sales

The measurement of sales recorded by retailers over a period of time is a reflection of either increased or decreased consumer spending, depending on whether sales are up or down for the comparative period a year ago. This indicator gives market participants an idea as to how strong or weak the economy is.

Geopolitical Events

Elections, financial crises, monetary policy changes, and wars can influence the biggest changes in the Forex market. These events can either change and/or lead to reshaping of a country's economy.

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