Understanding and watching the GDP for the US and eurozone can help both traders and non traders gauge the health of the relative economies thereby giving an insight into the future direction of the euro and the US dollar. Whilst GDP is considered a classic lagging indicator, and is always revised, it is nevertheless a measure of how fast or slow an economy is growing which is often reflected in the exchange rate. As GDP represents the total sum of goods and services made in a period and includes both items sold and those items yet to be sold, ie stock, the market is very sensitive to these figure and traders will monitor the headline rate very closely. It is the headline rate which will often move markets but in reality it is the longer term trend which is important in order to obtain 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 it is the bond market which is likely to react positively. Conversely if the figures are above expectation, then bonds may suffer as inflation pressure looms and in the US the markets will try to second guess whether the Federal Reserve 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.

(c) The Financial Times 2010

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