What Economic Indicators Impact Forex Trading?

The fundamental analysis involves looking at leading economic indicators in the forex markets to establish how they can influence funded trading. And while there’s no fireproof way to predict currency movements, there are some indicators you can use to make trading decisions. 

But first, let’s define the most commonly used terms in prop trading firms.

What Is the Special Drawing Rights?

The Special Drawing Rights (SDR) is a special reserve developed by the International Monetary Fund in 1969. The monetary reserve currency acts as a supplement to the existing reserves of its member countries. 

It was created as a way of easing concerns about the limitations of using the U.S. dollar and gold as the primary ways of settling international accounts. The SDR, therefore, helps to supplement international liquidity by complementing the standard reserve currencies.

The table below helps explain the current makeup of the SDR.

What Is Currency Trading?

At its most basic, currency trading using a funded account is similar to the process of exchanging currency that you may do when traveling internationally. It requires a trader to purchase one currency and then sell another. 

The exchange rate charged for these transactions will vary based on supply and demand. 

Trading occurs in the F.X. market, which operates all day and night from Monday to Friday. All trading is conducted through prop trading firms. Banks and other financial institutions help oversee this market instead of relying on a central exchange.

7 Economic Indicators that Can Impact Funded Trading

Economic indicators refer to statistical metrics or data points that help provide insights into the direction and overall health of an economy. If you’re to trade using a funded account, you’ll need to know the significance of the following indicators.  

1. Central Bank Interest Rates

Central banks have a responsibility to set the key interest rates. While each country will define this rate differently from the next one, there’s one thing that holds in all cases – it’s the rate at which all commercial banks will access loans from the Central Bank. 

Often, the central rate is normally quite close to the rate that a depositor will get when opening a savings or certificate of deposit account. 

2. Consumer and Business Sentiment Report

Various organizations are constantly surveying business leaders and consumers to create sentiment reports. Although the number of reports generated annually is staggering, they all assist in shaping the consumers’ expectations for the coming days. 

Consumer and business sentiment reports are important because every economy requires both parties to spend for it to thrive. If these parties become apprehensive about the economy, their spending begins to decline. This, in turn, impacts inflation, employment, and economic growth. 

These reports, therefore, act as leading indicators. And though inflation and employment figures are based on past quarters, sentiment reports help provide a look into what will happen in the coming days. They can guide a funded trader on what to expect in the future. 

3. Retail and Vehicle Sales

A savvy trader can use these sales reports to measure the demand prevailing in the economy. Retail sales reports measure the demand for finished goods, while vehicle sales reports do the same for the car industry. 

These two reports are crucial as all global economies run on consumer spending. They provide a direct measurement of spending, letting the trader know whether consumption has increased or decreased. 

Retail sales numbers provide a much broader view of consumer spending. These figures are normally compiled by the government on a month-by-month basis. Although a bit narrower, vehicle sales are much more practical as these are prepared by individual businesses. 

Experienced traders believe that vehicle sales provide better insight into general spending. They thus tend to use them as leading indicators for the retail segment when trading. 

4. Gross Domestic Product

Countries around the world release their GDP data on a quarterly basis. However, the Euro and the U.S. typically have preliminary releases. The GDP growth rate data highlights the total value produced by a given economy over a certain duration.

Therefore, a rise in the GDP growth rate means that the economy is growing at a faster rate than before. On the other hand, a fall in this rate implies the economy is growing at a slower rate. While this provides an outlook on how the economy is performing, it has some downsides. 

For example, GDP only focuses on the value of the goods and services that have been added to the said economy. It doesn’t account for the nature of the same activities. 

5. Purchasing Manager Index

Traders use purchasing manager indices to measure the prevailing direction of economic trends in specific industries. These indices are prepared in line with the purchasing managers’ view. A trader can use them to establish the health of a given sector. 

As is the case with price indices, every economy will typically release multiple PMIs. For example:

• A PMI figure of 50 and above shows that the purchasing managers believe that the business has recorded an improved performance for that month. 
• If the PMI is below 50, it shows that managers recorded reduced activity during that month compared to previous months. 

PMIs provide a quick assessment of how each sector is performing from the viewpoint of those working in it. What you need to note is that if a key sector in a certain country is stalling, this means the economy may follow suit. Conversely, if the sector is booming, the economy may record growth in the coming weeks. 

6. News Events

By now, you should have learned that not all news events are the same. For example, the general rule of thumb is that employment markets tend to move markets compared to manufacturing sales reports. 

When using a funded account, you need to pay close attention to the economic calendar. It can help you to determine which reports will have the most impact. Additionally, knowing when the markets are likely to move can benefit you a lot as a trader.

7. Government Announcements

Governments control fiscal policy, an indicator that has a major impact on currency pairings. For example, if a government is planning to fund a new infrastructure project, it will need to borrow money in the form of bonds. These are bonds it will then sell to investors. 

As a trader, you need to keep up to date with breaking news, especially those touching on fiscal stimulus packages. This ensures you don’t miss out on crucial events or decisions which may impact your trading strategy. 

Conclusion

The seven indicators mentioned above have a significant impact on funded trading. To use them to your advantage, you’ll need to perform a proper market analysis. This analysis will provide you with a better look into what to expect in the coming weeks. You should, however, note that no indicator is better than the other. As such, you must learn to take multiple metrics into account to gain a better picture of the forex market. To learn more about funded accounts, visit Audacity Capital today!