How To Forecast Economic Growth By Stacy Pruitt. Predicting currency movements is what allows you, as a forex trader, to benefit from the forex market. However, foretelling the future isn't exactly the easiest thing in the world to do. After all, if it were, everyone would be in the FX game. Yes, there is trading software out there, and your broker can be a potentially valuable source of news information, but you're not going to make any significant headway without a basic understanding of the major and minor economic indicators that drive currencies.
Gross Domestic Product
Otherwise known as “GDP.” This indicator represents all of the goods and services produced by domestic or foreign companies. The GDP tells us the rate of growth of a country's economy. It's one of the most valuable pieces of information you can have when trying to make a trade. A GDP on the rise is good for a country.
The manufacturing sector accounts for roughly one-quarter of the U.S. economy. In most industrialized nations, manufacturing is a cornerstone of the economy. Industrial production is a chain-weighted measure of the change in production of a nation's factories. It also includes mines and utility services. Sometimes, this is referred to as “capacity utilization.” When capacity utilization is low, it could be signaling a softening market.
Purchasing Managers Index
This index is published by the Institute for Supply Management. It details the new production orders, supplier delivery times, backlogs, inventories, prices and a host of other information. Knowing this is like pulling back the curtain on an economy to see how strong or weak it is.
Producer Price Index
The producer price index measures price changes in manufacturing. Average changes in selling prices are also tracked. Knowing whether prices are trending up or down can give you a clue about possible inflation or deflation in a sector. Alternatively, a nationwide increase or decrease in in prices may signal broad inflation or deflation. It's very helpful when determining which currency is strong or weak against another.
Consumer Price Index
This is a well-known index that measures the average price level for a fixed basket of goods and services. This index measures only urban consumers which translates to roughly 80 percent of the population. Still, it's a useful measure to gauge the health of a nation.
Durable goods refers to new orders placed with domestic manufacturers for immediate or future delivery. A durable good is something that is expected to last at least three years in service. Since many durable goods include cars, mobile phones, refrigerators, and even toys. These are, more or less, staples in a typical household and so are a good measure of economic health. If buying of durable goods increases, it may mean that consumers have more disposable income due to a strengthening economy.
Politics plays a huge role in currency movements. Because a nation's currency is controlled by a central bank, and subject to political pressure and influence, political news has a dramatic impact on what a nation's currency will do. Take Greece, for example. When its leaders first announced that it could not repay its debt, the forex market went wild. Savvy investors made a lot of money.
The U.S. dollar is the world's reserve currency, and every other currency in the world is tied to it. The dollar is heavily influenced by interest rates, since its money is essentially nothing more than monetized debt. This means that the central bank buys government debt, and issues currency in exchange for the debt. That currency enters the marketplace. If the money entering circulation exceeds production, inflation results. If currency is being taken out of circulation, it may result in deflation.
There you have it. These are the basics, but don't be fooled by them. Just because they're “basic” doesn't mean they aren't useful. While most forex traders are chasing an algorithm, you would do well to keep at least one eye on the fundamentals. Often, they will tell you something that a candlestick cannot.
Guest post contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading and forex indicator charts.