Which international economic indicators should be monitored in the forex world?

10 September 2020

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Economic indicators (GDP, key interest rates, consumer price indexes, etc.) are closely monitored by foreign exchange market players. The indicators in some countries or currency areas have a greater impact on the currency market than others. But which countries and which indicators are the most influential?

 

Economic indicators are broadly divided into three categories: leading, coincident and lagging.

Certain types of indicators have an immediate influence on the foreign exchange market, such as GDP and key interest rates. For others, like a consumer confidence index for example, the influence is less.

As some economies and currencies are very important, the associated economic indicators can generate a global impact. Thus, in addition to analysing the different types of indicators, it is recommended that they be read geographically, by country or currency area.

With this in mind, four regions deserve special attention :

  • The United States of America 
    The USA is the world’s largest economy in terms of GDP, and the US dollar is considered a safe haven.
  • The eurozone 
    With more than 340 million inhabitants in 2019, the euro area is a particularly important economic zone. The EUR/USD is the most traded currency pair in the world.
  • Japan 
    The Japanese economy ranks third in the world in terms of GDP. The Japanese yen (JPY) is one of the G3 currencies, the most widely traded currencies on the foreign exchange market.
  • The United Kingdom 
    The sixth largest economy in the world in 2019, the United Kingdom and its pound sterling (GBP) have a major influence on the currency market.

Within these economic zones, a number of economic indicators are monitored closely by forex market participants. This leads us to ask, which indicators should we pay particular attention to?

 
Which indicators to follow for the USA?

The United States remains the world’s largest economy and the US dollar is considered a safe haven.

Given its considerable influence, foreign exchange market players are very interested in indicators related to the U.S. economy.

Which US indicators deserve special attention?

  • The Nonfarm Payrolls report 
    A monthly report that establishes the number of jobs created outside the agricultural sector.
  • The ISM
    A monthly index that monitors changes in the manufacturing sector and provides a measure of the expansion or recession of the economy.
  • The Chicago PMI
    An index similar to the ISM, covering the Midwest region only.
  • Consumer Confidence
    A consumer survey that reflects their impressions of the state of the economy and the outlook for households.

Main indicators in the United States

INDICATOR TYPE DEFINITION PUBLICATION IMPORTANCE
 The Nonfarm Payrolls report Lagging
  • Lists non-agricultural employees, making it possible to establish the number of jobs created.
  • 95% of those polled responded, but the report is limited in scope.
  • No distinction is made between full-time and part-time employment.
  • Only 60% of the responses were published on time, resulting in a number of revisions and a relatively high margin of error.
Monthly Primary
The ISM (Institute for Supply Management) Coincident
  • Measures changes in the manufacturing sector according to 5 criteria: output, new orders, employment, delivery times, production levels.
  • Offers an insight into changes in business activity and identifies cycle reversals.
  • Index level:
    • +50 indicates growth.
    • -50 indicates recession.
Monthly Primary
Le Chicago PMI (Purchasing Managers Index) Coincident
  • Almost identical to the ISM.
  • The only difference is that it relates to manufacturing companies in the Midwest solely.
Monthly Secondary
Consumer Confidence (Consumer Price Index) Leading
  • Assesses consumers’ overall sentiment, current situation and outlook.
  • Studies the financial situation of households by assessing their perception of the country’s economic development.
  • Provides long-term analysis of consumer trends but is highly dependent on current political circumstances.
Fortnightly Secondary

 

Which indicators to follow for the eurozone?

The euro area is home to a wide variety of economic models.

As Germany accounts for 30% of the euro area’s GDP, European indicators relate mainly to this country.

They are not wholly representative of the entire euro area’s economic performance, but they do provide an insight into the performance of the single currency.

Which euro area indicators deserve special attention?

  • The IFO 
    German survey on companies’ current situations and economic prospects.
  • The ZEW
    A survey similar to the IFO, focusing solely on the banking sector.
  • Euro area manufacturing PMI
    Survey of euro area purchasing managers as a reflection of confidence.
  • Euro area CPI
    Monthly index offering a general overview of inflation in the euro area.
  • CPI France
    A monthly index similar to the Euro area CPI, but solely relating to France.

Main indicators in the eurozone

INDICATOR TYPE DEFINITION PUBLICATION IMPORTANCE
L’IFO (Institut für Wirtschaftsforschung) Leading
  • Updated on a monthly basis by Germany’s institute for economic research.
  • Based on the current situation and the economic outlook for companies in terms of production levels, prices, orders and inventories.
  • Gives a fairly reliable view of industrial production.
Monthly Primary
Le ZEW (Zentrum für europäische Wirtschaftsforschung) Leading
  • Similar survey to the IFO, covering only the banking sector.
  • Questions relate solely to the following items: exchange rates of interest, inflation, stock market indexes, foreign exchange market, businesses' potential profits per industry.
Monthly Primary
Euro area manufacturing PMI (Purchasing Managers Index) Coincident
  • Reflects purchasing managers’ confidence.
  • Concerns production, orders and employment.
Monthly Secondary
Euro area CPI (consumer price index) Leading
  • Provides an estimate of inflation in the euro area using the full set of price forecast data.
  • Data published monthly, with some products excluded.
Monthly Primary
CPI France Leading
  • Provides an evaluation of the inflation rate in the country.
  • Published in the official journal of the French statistical institute (INSEE) once a month.
  • Serves as a reference for indexing fungible French treasury bonds and the French minimum wage, and is used to set the rates for French savings accounts.
  • The index’s publication is late in comparison with that of other euro area countries.
Monthly Primary

 

Which indicators to follow for Japan?

In terms of GDP, Japan is the world’s third largest economy, despite a relatively low growth rate for an extended period.

Its currency, the yen (JPY), is part of the G3 currencies, the most traded in the world. Foreign exchange market players pay special attention to Japanese indicators.

Which Japanese indicators deserve special attention ?

  • The Tankan Survey
    A survey of private firms in the manufacturing sector conducted by the Bank of Japan, providing an indication of whether the economy is expanding or contracting.
  • National CPI
    Monthly survey of service sector businesses that assesses the outlook for this sector.

Main indicators in Japan

INDICATOR TYPE DEFINITION PUBLICATION IMPORTANCE
Tankan Survey (Bank of Japan) Coincident
  • Survey of private businesses in the manufacturing sector.
  • Covers the levels of activity and production, as well as employment prospects and orders.
  • Offers a simple analysis of this sector’s economic performance.
  • Index level:
    • +50 indicates growth.
    • -50 indicates recession.
Quarterly Secondary
National CPI Leading
  • Survey of companies in the service sector.
  • Focuses on growth prospects and employment, among other things.
Monthly Primary

 

Which indicators to follow for the United Kingdom?

The United Kingdom is the world’s sixth largest economy in terms of GDP, behind India (2019).

The power of the pound sterling (GBP) on a global scale is considerable and British economic indicators can exert a significant influence.

Which UK indicators deserve special attention?

  • Manufacuring PMI
    A survey of private firms in the manufacturing sector reflecting this sector’s economic performance.
  • Service sector PMI
    Monthly survey of service sector companies that assesses the outlook for this sector.
  • CPI
    Monthly index that measures inflation in the United Kingdom.
  • RPI
    Retail Price Index.

Main indicators for the United Kingdom

INDICATOR TYPE DEFINITION PUBLICATION IMPORTANCE
Manufacturing PMI (Purchasing Managers Index) Coincident
  • Survey of private businesses in the manufacturing sector.
  • Covers the levels of activity and production, as well as employment prospects and orders.
  • Provides a simple analysis of this sector’s economic performance.
  • Index level:
    • +50 indicates growth.
    • -50 indicates recession.
Monthly Secondary
Services PMI Coincident
  • Survey of companies in the service sector.
  • Focuses on growth prospects and employment, among other things.
Monthly Secondary
CPI (Consumer Price Index) Leading
  • An index measuring inflation in the United Kingdom.
  • The Bank of England has a target annual CPI inflation rate of 2%. This influences monetary policy.
Monthly Primary
RPI (Retail Price Index) Coincident
  • Index measuring retail prices.
Fortnightly Secondary

 

As you can see, each region has its own set of relevant indicators. The examples presented above provide an overview of the main indicators monitored internationally and make it possible to assess foreign exchange market developments likely to have an impact on corporate activity.

In order to ensure a fair analysis, two elements must be kept in mind. The type of indicator studied and the country or currency area to which it refers. Certain economies and currencies have a significant global influence. Economic indicators for these areas are very closely scrutinised by foreign exchange market participants. Fluctuations in the dollar or the euro will inevitably affect the value of less traded currencies. Any announcement or publication that may provoke such fluctuations deserves special attention, as the impact on business activities may be considerable.

In order to carry out a comprehensive analysis, a full economic calendar should be adhered to, marked throughout the year by all the major publications affecting international exchange rates.

 

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