GDP is a classic lagging indicator and foremost in reporting on the health of the economy. In simple terms, it measures how fast or slow the economy is growing. As a forex trader you need to monitor this figure closely for signs of slow down or growth. GDP is the total sum of goods and services made in the period and includes both items sold, and those items yet to be sold i.e. stock. The market is very sensitive to these figures, but it is the longer term trend that is important, so we need to compare trends in GDP over the last years for a comparative and meaningful analysis.
When the actual GDP figures are released the first question everyone asks is – “How does this compare with expectations ?” If the figures are below those expected or forecast by the economists, then the bond market is likely to react positively. Conversely if the figures are above, then bonds may suffer as inflation pressure looms with the possibility that the Fed will intervene sooner or later, and raise rates. To foreign investors a strong economy is viewed more favourably than a weak one. A robust economy will fuel demand by foreign investors in the stock markets and from higher yielding Treasury bills, which in turn will increase demand for the currency. However, it is not always this clear cut. If the central bank move more slowly in raising rates, then inflation could accelerate, lowering competitiveness and weakening the currency.
GDP figures affecting the Euro and the dollar are released on a quarterly basis, and as I said earlier, how these figures affect the currency pair will depend on many factors, not least of all, how they compare against forecast, but also how they compare with each other. In simple terms its the euro vs dollar!! The key thing is to consider what effect the numbers will have on the flow of currency between the two countries, and to what extent trader, investors and speculators will view the numbers and hence their long term view on the strength or weakness of one currency compared to another.
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