Which economic indicators should you monitor? How should they be assessed?

19 August 2020

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Economic indicators (such as GDP, key interest rates, consumer price indexes, etc.) are closely monitored by forex market players. But their analysis raises a number of questions. For example, how should these indicators be assessed? Which are the most compelling and relevant? How often should they be monitored?

 

Indeed, various economic indicators are published on a regular basis by public and private institutions. They offer an insight into the state of different economies and the fluctuations of the currencies they represent.

By analysing these indicators, it is possible to predict potential changes in the foreign exchange market. And yet, some indicators bear a greater influence than others. Their impact depends on a number of different variables, including the type of indicator, the relative clout of the index under consideration and the size of the country or currency area in question.

 
What are the different types of economic indicators?

There are three types of economic indicators: leading, coincident and lagging.

1. Leading indicators... 

  • Predict real economic activity.
  • Reflect the impressions consumers and professionals have of economic trends.
  • Leading indicators are then either confirmed or refuted by lagging indicators.
  • Example: consumer confidence index.

2. Coincident indicators... 

  • Measure real economic activity at the time of their publication.
  • Provide a concrete assessment of actual economic activity.
  • Example: manufacturing PMI for a country or an economy.

3. Lagging indicators... 

  • Relate to past economic activities, assessed over a defined period.
  • Confirm or refute a trend reflected by a leading indicator.
  • Have an immediate impact on the currency market.
  • Example: the unemployment rate.
 
Which indicators are monitored most closely?

In terms of impact, reliability and regularity of publication, the main economic indicators vary greatly. These are just some of the factors that determine the indicators that forex market players will decide to monitor most closely.

But how can you gauge the respective importance of different economic indicators?

1. Primary indicators

Although each indicator has its own level of importance, some announcements or publications bear an immediate impact on exchange rates. This is true of GDP, retail sales reports and the key interest rates set by central banks, for example.

2. Secondary indicators

Other indicators are more general. They offer an estimate of trends which may subsequently be refuted, such as consumer confidence indexes or those relating to housing construction. Their impact on the currency market is often less significant in the immediate term due to their predictive nature.

 

Primary indicators

INDICATOR TYPE DEFINITION
 Gross domestic product (GDP) Coincident / Lagging
  • Total economic wealth produced by a country over a one-year period. The total value of the production of goods and services within a given country.
  • Calculates a country’s economic growth and level of development.
 
Key interest rate
 
  • Interest rate set by a central bank.
  • Determines the cost of credit within a country or a currency area.
  • If the policy rate is low, the cost of credit will be low, stimulating growth.
  • It is published on a monthly basis by central banks, and its impact can be very significant.
  • Closely monitored by financial market players.
Consumer Price Index (CPI) Leading
  • Primary measure of inflation within an economy.
  • Based on changes in the prices of products consumed by households between two periods.
 Unemployment rate Lagging
  • Percentage of people of working age who are not gainfully employed, but who are seeking work.
Retail sales reports Coincident
  • Evaluate consumer spending and retail trade activities.

 

Secondary indicators

INDICATOR TYPE DEFINITION
 Consumer confidence reportd Leading
  • Measure current economic conditions as perceived by consumers.
 Manufacturing PMI  Coincident
  • Gives an indication of manufacturing conditions within a country based on observations made by purchasing managers in the manufacturing sector.
  • Takes 5 factors into consideration: new orders, stocks, employment levels, delivery times, output.
Economic climate Leading
  • In Europe, this index is callled the ZEW (Zentrum für Europaïsche Wirtschaftsforschung), named after the German research centre that measures institutional investors’ and analysts’ expectations regarding developments in the German economy.
  • Assesses European investor confidence.
 Industrial production Coincident
  • Assesses quantities produced in the secondary sector only.
Balance of payments Lagging
  • Calculates all exchanges of goods, services and capital between a country and the rest of the world.
  • Compares incoming revenues from overseas and payments made to other countries.
  • Draws comparison between the strength of exports and dependency on imports.
Housing construction Leading
  • Calculates the number of new residential buildings under construction over a given period.
  • Assesses the state of the property market.
  • Establishes or indicates positive or negative trends within the sector.

 

How to decide which international economic indicators to monitor?

The country, monetary area and currency pair of interest are key elements in determining which indicators are the most relevant to monitor. These will vary depending on your company’s business activities and international presence.

It should be noted that some countries have very important economies in global terms. By way of example, we can cite the likes of the United States, Japan and the United Kingdom, to name but a few. Given their importance, it stands to reason that these countries’ currencies are of particular relevance too.

The US dollar (USD), the euro (EUR) and the Japanese yen (JPY) – also known as the G3 – are the three most widely traded currencies in the world. Indicators relating to these currency areas are therefore likely to have a global impact on the forex market, and are thus closely monitored by analysts.

 

The types of indicators presented above are followed particularly closely by forex market players. Some have a significant impact at their time of publication. Others have no apparent effect at global level in the immediate term.

An indicator’s impact on the market depends on several factors, including the scope and accuracy of the data being analysed, as well as the currency area in question. One of the key factors remains the element of surprise. The more unexpected the data revealed, the greater the impact on exchange rates.

To anticipate fluctuations in the currency market, it is important to follow a comprehensive economic calendar.

 

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