Economic indicators play a huge role in the forex market, particularly in the form of fundamental analysis. Some of the most influential indicators for the dollar include Non Farm Payroll, Federal Open Market Committee (FOMC) interest rate decisions, trade balance, Consumer Price Index (CPI), and retail sales.
Non Farm Payroll (NFP) is a good indicator of the employment rate and overall strength of the labor market. It represents all business employees excluding general government employees, private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to GDP. The full report also includes estimates on the average work week and weekly earnings of these employees. As a general indicator of the health of the economy, usually the dollar in forex trading is affected more the further from expectations the figure for NFP turns out to be. The general trend for NFP since 1990 has been increasing. Overall, NFP has increased from 109,144 in January of 1990 to 135,106 in May of 2006. Generally, when NFP is lower than expected traders will begin to sell the US dollar on the belief that it is weakening. The opposite is true for an unexpectedly high NFP. NFP is released at 8:30am EST on the first Friday of every month and tends to cause an average move of 124 pips in the EUR/USD.
Federal Open Market Committee (FOMC) decisions in general indicate the overall strength of the economy. The FOMC sets the discount rate or federal funds rate (the rate that the Federal Reserve Bank charges member banks for overnight loans) which is highly influential on the forex market. Because interest rates are set higher to induce foreign investment and therefore fight inflation during times of prosperity and lower to increase spending during recessions, they are an important indicator of the strength of the dollar. Increases in interest rates tend to lead to a strengthening of the dollar, while decreases usually precede a depreciation. Therefore, following rate hikes traders usually buy the dollar, anticipating an increase in its value. The opposite is true when the FOMC reduces rates. For the past 15 years the federal funds rate has experienced a net decrease, from 8.23% in January of 1990 to 4.94% in May of 2006, with periods of significant variance inbetween. There are eight scheduled FOMC meetings per year, each of which is usually followed by an average move of about 74 pips in the EUR/USD.
Trade balance measures the difference in value of the goods and services the US imports and those that it exports. From another perspective, it may also be considered the difference between national savings and national investment. A surplus exists if the exports exceed the imports, and a deficit, the current situation for the US, exists if the opposite is true. The balance can be affected by a variety of factors, including prices of domestic goods, exchange rates, trade agreements or barriers, and other trade regulations such as tariffs. Trade surpluses are generally not bad for the economy, but may lead to harmful protectionist policies. Deficits may lead to loss of jobs and problems with debt servicing. The US has had a trade deficit since the 1970s, at 1.7 billion in 1990, 6.7 billion in 2005, and continuously increasing. This could be because of the dollar’s use as a reserve currency and its overall strength, the growth of the US economy, high demand for American investment assets, rising oil prices, and globalization. Depreciating the dollar could be a possible solution to this imbalance, through a variety of methods. This would give consumers less purchasing power, ideally leading to a decrease in imports. This makes the trade balance less relevant as an immediate influence on forex trading but rather valuable as an alert to likely future Fed decisions. In general, however, a deficit is considered a sign of US economic weakness and therefore may lead traders to short the dollar. Trade balance is usually released near the middle of the second month after the reporting period and is followed by an average move of 64 pips in the price of the EUR/USD.
The Consumer Price Index (CPI) is a statistical measure representing inflation based on a fixed basket of consumer goods. Used to deflate other economic indicators and set wages, CPI is useful throughout the economy. The US CPI has been steadily increasing for the past 15 years, from 127.5 in January of 1990 to 201.0 in April of 2006. The response of traders to CPI is difficult to predict because although a high CPI is a signal of trouble in the economy, prompting traders to short the USD, it also tends to forecast interest rate increases by the Fed to which traders usually respond by buying. CPI is released around the 13th of every month at 8:30am EST followed by an average move in the EUR/USD of 44 pips.
Retail sales is a figure measuring the amount of goods sold by a sampling of stores, meant to be representative of consumer activity and confidence in the economy. Therefore, high retail sales numbers imply a strong economy. The retail trade sector, as delineated in the North American Industry Classification System (NAICS) is considered to include companies selling finished goods or rendering services incidental to the sale of finished goods. Since 1992 the US retail sales numbers have been steadily increasing, jumping from 7.14 billion in January of 1990 to 8.77 billion in May of 2006. Generally forex traders respond positively to high US retail sales numbers and long the dollar, shorting it when the figure is lower than expected. Retail sales numbers are announced around the 11th of every month at 8:30am EST causing an average 44-pip movement in the EUR/USD.