Forex Trading Articles

FUNDAMENTAL ECONOMIC INDICATORS ARE ESSENTIAL FOR PREDICTING FOREIGN EXCHANGE (FOREX/FX) CURRENCY MARKET PRICE ACTION

By Larry Litchfield for Forexmentor.com
©2007, Currex Investment Services Inc.

Jan. 12, 2007

“When focusing exclusively on the impact that economic indicators have on price action in a particular market, the foreign exchange markets are by far the most challenging, and therefore, have greatest potential for profits of any market.

Obviously, non-economic indicators also move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators. The challenge comes in diligently keeping track of the nuts and bolts of each country's particular economic information package”. http://www.forex.com/forex_economic_indicators.html

The previous comment taken from Forex.com more or less explains why we trade currencies. It also compels us to learn all we can about the economic indicators of the country’s currency we trade.

The state of each economy we trade should be of concern to currency traders. To predict if the economy will go up or down we must look at “economic indicators” for hints and clues. We must make time to learn how to read the indicators and understand their inter-relationships. Once mastered, we can then begin to forecast future business cycles.

To help you understand the inter-relationships of the indicators it is useful to know that most economic indicators fall under one of three categories—leading, lagging or coincident. Leading indicators anticipate the direction of the economy's future. Coincident indicators reveal the economy's current status. Lagging indicators change months after the start of a downturn or upturn so they give the Fed an idea of how long the economic downturn or upturn will last. By studying the indicators as they fall into these categories, the Fed can determine which phase of the business cycle the economy is in at the time. There are four phases of the business cycle of increasing and declining economic growth. They are (1) expansion or recovery, (2) peak, (3) contraction or recession, and (4) trough. As the economy goes from one phase to the next, the economic indicators change. While leading indicators tend to change before the economy enters a new phase, coincident indicators change currently and lagging indicators change afterwards.

In addition to the economic indicators the Fed also reviews numerous other items such as regional reports and The Beige Book, a report that sums up comments from businesses and other contacts. It is interesting to note that during a calm economy, the Federal Reserve chairman checks data about the economy every half hour or so, and when things are not tranquil, he accesses the information every 15 minutes. By doing so, the Fed can keep abreast of the economy's current status and future direction.

Understand that our economic system relies on the theory that expectations of future profits propel the economy through the different phases. When business executives anticipate increasing sales and profits, companies generally boost production of goods and services and investment in new structures and equipment. On the flipside, if they think profits are headed south, they cut back on production and investment. Indeed, firms' actions trigger the four phases of the business cycle.

Please keep in mind the following points about economic indicators:

• There are numerous economic indicators that can move currency market prices.
  
• Understand that economic indicators consist of specific financial and statistical information about various segments of each of the worlds’ economies.
  
• All data is published by various government agencies and in some cases the private sector.
  
• Data is released to the public on a regularly scheduled basis.
  
• The economic indicators are followed by almost everyone in the financial markets.
  
• Because so many people, institutions and markets access the economic indicators, they have the potential to move prices (price action) and account for significant volume (momentum) upon their release.
  
• Many currency traders refer to economic indicators as the heartbeat of the FOREX/FX markets.

Following is a listing of some of the more important economic indicators.

• Consumer Price Index (CPI)
  
• Gross Domestic Product (GDP)
  
• Housing Starts
  
• Nonfarm Payroll Employment
  
• Industrial Production/Capacity Utilization
  
• Retail Sales (PCE)
  
• Business Sales and Inventories
  
• Durable Goods
  
• Institute of Supply Management (ISM), formerly Purchasing Managers Index (PMI)
  
• Producer Price Index (PPI)
  
• Consumer Confidence
  
• Existing Home Sales
  
• Beige Book
  
• Chicago PMI
  
• Trade Balance
  
• Empire State Business Conditions
  
• TIC Report
  
• New Home Sales
  
• FOMC Meeting Minutes

Proceed to Part III: Import Indicators for Maximum Profits

Index of All Forex Trading Articles

"Understanding Global Events"
Video CD Course

Finally, a complete educational resource that shows you how you can stay informed of the economic events that influence the global markets each day.