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Top five economic indicators that influence the FX markets

Trading the forex markets requires not just knowledge about technical indicators but also the fundamentals. It is after all, the fundamental news that brings and changes the trends in the forex markets.

As a result, traders should keep an eye out on fundamentals as well. You don’t need to study economics but following some of the major fundamental news events can help you to understand the forex markets better.

Here are top five economic indicators and reports that every forex trader should know about.

Gross Domestic Product or GDP

The Gross domestic product or GDP is unarguably, one of the biggest fundamental events that influences the currency markets. It is an economic indicator that measures the gross domestic product of an economy.

The GDP report is usually released on a monthly and quarterly basis and can change from one economy to another. For example, countries such as Australia, New Zealand, the United States, Japan and the Eurozone release the GDP figures on a quarterly basis. On the other hand, countries such as Canada and the UK release GDP numbers on a monthly and quarterly basis.

The GDP report is important because it shows the health of an economy. In a growing economy, the GDP tends to rise at a steady pace. Central bankers look to the GDP as one of the key economic indicators and based on this, monetary policy decisions are taken. Interest rates can either be cut or raised depending on whether the GDP is rising or falling.

Inflation Report

The inflation report is another important indicator that is used when determining interest rates. The inflation report or consumer price index measures the relative change in a basket of goods. Inflation can rise or fall for a number of reasons. Typically, inflation rises when there is too much demand for goods and services. This demand is created by increased money supply. As a result, the demand for goods and services tends to drive prices higher.

However, it is not that straight forward. The value of the currency also plays a big role. When a currency's value falls, the cost of importing goods and services can increase. This in turn can create price pressures. Inflation is one of the key economic indicators that is used by central banks. Across many central banks, maintaining price stability or inflation is one of the mandates of the monetary policy.

Unemployment Report

The unemployment or the labor market report gives the overall state of the labor market of the economy. This report measures the national unemployment rate, the number of jobs added during the reporting period and the pace of growth in wages.

The unemployment report is released on a monthly basis and it is also one that attracts a lot of attention. The most famous of all the unemployment reports is of course the US non-farm payrolls report which is released on the first Friday of every month.

This report brings short term volatility to the USD and therefore impacts every major currency pair. Maintaining low unemployment rates is also one of the mandates by many central banks. The Federal Reserve bank of the United States for example has a dual mandate to maintain price stability as well as targeting low unemployment rates.

Monetary Policy Meeting

The monetary policy meeting is interchangeably used with interest rate decisions. Monetary policy decisions are made after central bankers assess the general state of the economy, by looking into the economic reports.

Central banks hold their meetings every month, but most of the big decisions often comes during the quarterly months. This is where a lot of decisions take place and the markets also brace for volatility. Traders look to central bank meetings to not only understand whether interest rates will be cut or hiked, but they also look toward economic projections and future guidance on monetary policy.

Speeches from monetary policy makers

Central bank monetary policy makers also give speeches at various forums and give interviews on television. When a central banker speaks, traders pay attention. This is because their talks can give clues on the thinking behind the monetary policy decisions.

Many big central bank decisions actually came initially via such speeches and events. Traders basically look for any clues and also to see whether the monetary policy maker is hawkish (supportive of higher interest rates) or dovish (supportive of lower interest rates).

Central bank speeches can happen before or after a monetary policy meeting. But usually, no speeches are made one week before a central bank meeting. This is known as the black-out period where no members of the central banks are allowed to speak to the public on monetary policy.

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