Learn how to understand various macroeconomic data releases and indicators, and how they could impact the financial markets.
In this lesson, we'll cover
A large part of fundamental analysis is factoring in macroeconomic data releases. While some indicators have more impact than others, data releases that take the market by surprise - either by coming in below or exceeding expectations - can cause considerable market volatility.
Let’s start with introducing some key macroeconomic indicators which can drive the market.
Employment - the pulse of an economy
Perhaps one of the most important indicators of the health of an economy is employment. That’s because it influences all aspects of economic activity, from demand to supply.
Unemployment rates show the percentage of the total labour force that is unemployed, but actively seeking employment and willing to work. A steady increase in unemployment levels can be interpreted as a manifestation of a deteriorating economic situation of the country, negatively perceived by the financial markets as a signal to retreat from the currency. In general the market historically has concluded that the higher the unemployment level, the weaker the currency.
One of the most high-impact macroeconomic releases of modern times are the US non-farm payrolls. Non-farm payrolls are released on every first Friday at the month at approximately 2.30pm, outlining newly created jobs in the non-agricultural sector and the unemployment rate for the previous month.
Because consumers make up nearly 70% of US economic activity, the state of the labour market is of paramount importance to the overall well being of the country. Better than expected growth in NFP could indicate the US labour market is strengthening, improving the prospects for the US economy, and thus could have a positive effect on the US Dollar and US stocks.
Weaker than expected growth in NFPs or even a bad loss of jobs can have the opposite effect, dampening US economy prospects and see a weakening in the US dollar and US stocks. It could also trigger a rise in the price of Gold, should investors seek the precious metal as a safe haven.
Inflation - key to central bank decisions
The main objective for central banks is to promote price stability in the economy. Price stability is measured as the change in inflation, so investors monitor inflation reports for clues as to the future course of central banks’ policies.
CPI - or Consumer Price Index - is one of the most important indicators of inflation. It is a statistical estimate constructed by using the prices of a sample of representative items whose prices are collected periodically. CPI simply measures the rise of prices for goods and services and it is computed for different categories and subcategories.
If the publication of CPI is higher than expectations, this means that inflation pressure is high and the central bank could potentially raise interest rates, which could lead to an increase in the value of the currency.
Generally speaking, central banks might try to counter a rise in inflation with higher interest rates, which can lead to a currency strengthening. A low rate of inflation on the other hand can be countered with lower interest rates, which can lead to a currency weakening.
GDP - the true colour of an economy
GDP - or Gross Domestic Product - is the widest indicator of a country's economy and shows total market value for all goods and services produced in a given year. GDP impacts personal finance, investments and job growth. Investors might look at the growth rate of a country or economy to decide if they should adjust their asset allocation. They also compare countries’ growth rates against each other to decide where the best opportunities could be. Such a strategy could also include the purchasing of shares of companies that are in rapidly growing countries. For example, let’s suppose that the GDP in Germany is rising fast and that the economy outperforms others. You could buy a CFD based on the DE30 (Dax underlying, the German Stock Exchange Index) as it could rise higher than the stock markets of other countries.
Cutting through market noise
Each day, almost every hour, a lot of macroeconomic data is published - so it’s easy to become overwhelmed. However, as a trader you have to know which figures may influence your open positions and what’s really worth looking at. At the beginning of your trading journey, it might be worth focusing on the three indicators mentioned above, before digging deeper into other data such as the consumer sentiment, business surveys or even retail sales.
Please bear in mind that in addition to the above mentioned macroeconomic events or indicators, there are many other data and indicators to consider that could also influence the prices on financial markets.
This presentation is provided for general information and marketing purposes only. Any opinions, analyses, prices or other content does not constitute investment advice or a recommendation. Any research has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk. XTB will not accept liability for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.
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