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.
Industrial Production
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
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.
Geo-Politics
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.
Interest Rates
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.
Consideration
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.
Author
Bio:
Guest post contributed by Stacy Pruitt, a
freelance forex strategy and finance writer. Stacy writes about advanced
trading and forex indicator charts.
