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Economic Indicators Used in Fundamental Analysis

Economic indicators provide traders with valuable insights into the health and direction of the economy, helping them anticipate market trends and make informed trading decisions. This page explores key economic indicators crucial for fundamental analysis: Unemployment Claims, Inflation, GDP Growth, Interest Rates, Deflation, and Geopolitical Events.

Unemployment Claims

Unemployment claims are one of the biggest telltale signs of a growing or slowing economy. Every Thursday, the ForexFactory website releases the US’s unemployment claims for the week. For instance, if jobless claims were expected to be 427,000 for a week but only 406,000 were actually reported, this beats expectations by 21,000 less claims. This is a positive signal for the economy and can lead to a rise in the value of the USD.
Unemployment Data from the A1 EdgeFinder

Unemployment Takeaways:

Unemployment claims reveal what is fundamentally happening in the economy.
They indicate either a growing or slowing economy, guiding traders in interpreting jobless reports.
If the number of jobless claims is less than expected, it signals a growing economy; if not, it indicates potential economic trouble.

Inflation

Inflation metrics are some of the best ways to determine the health of a currency pair and predict its long-term direction. The Consumer Price Index (CPI) is commonly used to measure inflation. CPI gauges the price of consumer goods and services, reflecting the overall value of a currency. When CPI rises, so does inflation.

For example, the United States experienced a significant spike in inflation as of 5/18/2021. This spike led to a decrease in the USD's value, prompting traders to consider shorting pairs like USD/CAD or USD/JPY and longing pairs like EUR/USD or GBP/USD.
Inflation Data from the A1 EdgeFinder

Inflation Takeaways

Inflation measures the buying power of the dollar.
Higher inflation reduces buying power.
It helps predict a currency's long-term direction and is a key component in assessing an economy's health.

GDP Growth

Gross Domestic Product (GDP) measures the value of all goods and services produced in an economy. It is one of the most common indicators for assessing economic outlook and its effect on any currency. A growth in GDP usually suggests bullish news for the currency, whereas a fall in GDP indicates bearish news.

For example, the GDP growth rate for European countries transacting with the euro slowed from July 2018 before turning negative in the first quarter of 2020. This decline caused the euro to fall in value, demonstrating the strong correlation between GDP growth and currency strength.
Forex Fundamentals EXPLAINED: How to Trade GDP Growth Figures like a Pro!

Inflation Takeaways

GDP measures the value of all goods and services produced in an economy.
It is a crucial indicator for fundamental analysis.
Changes in GDP growth can guide traders in making informed decisions.
GDP growth or decline can indicate the long-term trend of a currency pair.

Interest Rates

Interest rates are the charges levied by lenders on top of the principal investment. They are expressed as percentages, which could be positive or negative. Traders use interest rates to measure a currency's strength. If a nation’s interest rate is negative, banks pay you to keep your money there.

For example, traders might short GBP/USD because the US has a higher interest rate than the pound. Conversely, they might long GBP/JPY because the pound has a higher interest rate compared to Japan’s negative interest rate for the yen.

Interest Rates Takeaways:

Interest rates are charged on top of the initial investment of an asset.
Negative interest rates mean banks pay you to keep your money with them.
Higher interest rates generally indicate a stronger currency, influencing trading strategies.

Deflation

Deflation makes a currency stronger as it usually results from decreased money supply, reduced government and consumer spending, or lower prices of consumer goods. Like inflation, excessive deflation is harmful to an economy but can also act as a bullish catalyst for a currency that might be getting too inflated.

For example, if the US raises interest rates over 0.25%, it would cause consumers to spend less and save more, decreasing the money supply and causing deflation. Historically, the US experienced significant deflation during the Great Depression in the 1930s and the recession of 2008.

Deflation Takeaways

Deflation occurs when money supply decreases, government spending reduces, or consumer prices drop.
Excessive deflation discourages spending and is harmful to the economy.
Raising interest rates can induce deflation.

Geopolitical Events

Geopolitical events occur in specific geographical regions where countries' policies are affected or involved. Such events can significantly impact global markets. For instance, the first cases of COVID-19 reported by China led to a global economic shutdown as countries halted trading, profoundly affecting global economies.

Geopolitical Takeaways

Geopolitical events influence foreign or domestic policies.
These events can have far-reaching effects on global markets.
Understanding and analyzing these economic indicators—Unemployment Claims, Inflation, GDP Growth, Interest Rates, Deflation, and Geopolitical Events—are essential for effective fundamental analysis. They provide critical insights into the economic health and future trends, helping traders make informed decisions and anticipate market movements. By closely monitoring these indicators, traders can better navigate the complexities of the financial markets and optimize their trading strategies.
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