The Importance of Economic Indicators
Economic indicators come in many different varieties, but they all share commonalities in the sense that they provide quantitative data releases of important economic variables. These include announcements by reserve banks on things like interest rates, labour statistics, housing data, GDP, inflation and the like. Economic indicators are the most comprehensive set of tools available to traders across the spectrum – novices and experts alike. To make it easier for traders at AvaTrade.co.za, we have divided up the economic indicators of several important regions including the US, Europe and Asian economies.
South African traders will no doubt find tremendous value in the economic calendar that we have provided. It details all of the upcoming economic data releases on the financial calendar.
What types of economic indicators are available?
Indicators vary in frequency of release, scope and importance. Some indicators are offered to traders on a daily basis, while others may be available on a monthly basis, and some others are available quarterly. Quarterly data releases include things like quarterly earnings reports for listed companies, while monthly reports include employment numbers such as nonfarm payrolls on an annualized basis. The most important economic indicators are things like the federal funds rate (FFR) announced by the Fed, interest rates announced by the European Central Bank, the Bank of England, and the Bank of Japan etc.
Prior to the release of economic indicators, speculators get together and develop consensus forecasts for upcoming data releases. It is these forecasts and the actual performance figures that determine how much markets will move when actual numbers are released. All economic events have a twofold influence on the markets – the first being the announcements of the economic event, and the other being the speculative assumptions that are made before the events. Remember that the difference between consensus forecasts and actual numbers is what drives markets. Things like earnings surprises can propel markets, or sink them. If government is bullish about the upcoming employment reports or the country’s GDP, this will naturally boost markets, and this bodes well for that country’s currency.
An Example of How Economic Indicators Work
Nonfarm payrolls reports are released on the first Friday of every month by the US Bureau of Labor Statistics. This particular economic indicator is significant for the US economy and the global economy. Of course, it refers to the number of people employed in the US in nonfarm employment. This figure is released on a monthly basis, and it measures the performance from month-to-month or on an annualized basis from the same period in time a year ago. The vast majority of the US economy is involved in nonfarm-related activity. That is why this report has such sway with the financial markets.
If the US economy is hiring increasing numbers of people, this bodes well for the greenback and the US economy. In anticipation of a strong nonfarm payrolls report, a trader may take out a net long position on the US economy, and given a positive outcome will likely benefit handsomely. If the unemployment rate increases – more people are unemployed – the USD will weaken and less demand for the currency will ensue. However, if the consensus forecast is matched or exceeded, demand for the USD will increase and the currency will strengthen.
Using Economic Indicators in a Practical Way
Market analysis needs to be conducted prior to using economic indicators. As a South African trader, you can easily access all of the economic indicators available right are at AvaTrade.co.za. The level of research that traders require will vary from one to another, but the more comprehensive your research, the greater the probability that you will profit from the financial markets. Speculators make myriad buy and sell decisions on a daily basis. If they anticipate economic indicators to yield positive results, they will profit handsomely if this comes to pass. For positive expectations, traders open up net long positions on a financial asset and for negative expectations they open up a net short position on the asset.
It is always vital to understand precisely what is going on in the financial markets before assuming anything about economic indicators. Sometimes events may cancel one another out such as the diminished prospect of a Fed rate hike and anxiety over a Brexit referendum. Markets should be viewed in totality, with an understanding that uncontrollable variables will always pop into the equation. All speculative assumptions that are made about economic indicators should be based on sound thinking. The economic calendar is the most valuable resource available to traders – and it’s 100% free. You’re encouraged to browse through the economic calendar and read up about all related factors. Whether you are a newbie trader or a seasoned professional, the value of an economic calendar is paramount. The more accurate your trades are, the quicker you rise through the ranks.