The Gross Domestic Product or GDP fundamental economic indicator is one of the most closely watched indicators used by forex traders. Furthermore, both the influential data’s initial release and its subsequent revisions can often result in wild swings in the forex market. The level of the GDP is commonly used by economists and fundamental traders to assess the level of growth and economic health in a country’s economy. This data can also be used to provide a sense of the standard of living prevailing in a nation. Our article explores the importance of the relationship between the GDP and forex trading.
The GDP Indicator and What it Measures
The Gross Domestic Product indicator is typically expressed on an annualized basis, and it measures the overall value of the productivity of an economy. GDP can be computed in three ways known as the product (or output) approach, expenditure approach and the income approach, which should theoretically yield similar results.
Specifically, the GDP for a country includes the production of goods in its economy, as well as the value of such things as investments, services and the trade balance. The data also includes government and other public spending.
GDP differs from Gross National Product in that it leaves out the overseas profits of domestic firms, in addition to the earnings reinvested in the foreign based operations of domestic companies.
The changes seen in the GDP can have a large effect on an economy. When the GDP of an economy is rising, the country will often see businesses expand and hire more staff in an attempt to keep up with the growing demand for products and services. Also, more goods will usually be exported, and the country’s business cycle improves to reflect the expanding economy.
On the other hand, a declining GDP tends to signal an economic slowdown in a country. The demand for products and services tends to be reduced during such periods that show a contraction in the GDP or negative GDP growth as the business cycle moves towards recession.
How to Evaluate the GDP Indicator
Basically, the GDP indicator provides economists and forex traders with one of the most important pieces of information with which to gauge if a nation’s economy is growing healthily or contracting in a recessionary business environment.
The GDP indicator usually signals a strong and healthy economy when it is growing at an annualized rate between +3% and +3.5%. At such moderate growth levels, the GDP will not usually signal that too much inflation may result, although higher growth levels could signal excessive inflationary pressures building within the economy.
On the other hand, lower growth than that is often seen as a signal of a weak economy, while a negative number is considered recessionary or even a signal of a depression.
Specifically, if a nation’s GDP declines for several months, then that is considered a temporary recession, but if it falls by more than ten percent for several years, then that indicates an economic depression for the country.
The GDP’s Release Calendar
In the United States, GDP data is released on a quarterly basis by the U.S. Department of Commerce’s Bureau of Economic Analysis.
This quarterly report is generally expressed in terms of an annualized change that is computed by multiplying the change for the quarter by a factor of four.
Four weeks after each quarter ends, the Advance GDP data for that quarter is released in the United States. Then, the Final GDP data is released three months after the quarter ends.
Forex Market Impact of the GDP Data
The GDP has a top tier reputation as one of the most closely watched of all of the key fundamental indicators. Both its initial release and its revisions can result in significant financial market activity and exchange rate fluctuations.
Basically, when the Gross Domestic Product data for a country comes out higher than the market is expecting, then that is usually positive news for the currency of that nation. Buoyed by such good news, that currency will often subsequently appreciate relative to other currencies.
Conversely, when the GDP data for a country comes out lower than the market is expecting, then that is usually negative news for the currency of that nation, which will often subsequently depreciate relative to other currencies.
Central banks such as the U.S. Federal Reserve Bank often use the level of their country’s GDP to determine the nation’s economic strength since it is an especially broad based fundamental economic indicator.
The level of the GDP for an economy can have a significant impact on the monetary policy decisions made by that country’s central bank. As a result, the important GDP data’s release can often prompt substantial exchange rate movements, and it can also significantly influence stock market valuations and bond prices.
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