Economic data and important global economic reports play a very important role in the movement in the Forex market. Tracking and analyzing these data is an essential part for a Forex trader as these important economic reports create an elevated level of volatility due to increased speculation in the market at the time of the data release. Gross Domestic Production (GDP) data is one of the most influential data in the Forex trading market as the GDP of the United States plays a huge role in the movement of the U.S. Dollar and it has the power to move the market upside down. In this blog, we are going to discuss the importance of the GDP report of the United States and how a Forex trader can use this major economic report to make a profitable trade.
GDP is one of the most important economic reports which have a huge impact on the domestic as well as global currency market if we talk about the GDP of United States as it indicates the health and growth of the country which helps global investors to decide whether to invest or not in the economy. The currency market tends to react on the GDP number as these numbers are a perfect reflection of the economic state of the country which directly affects the value of the country’s currency. As a constant growth in the GDP numbers results in an increased confidence in the economy and fiscal policymakers and they can further support the interest rates which attracts the foreign funds.
What is GDP?
Gross domestic product is the total value of all the goods and services produced in a countries economic boundary. Gross domestic production number includes all the goods and services which is classified in consumption, government expenditures, Investments, and exports sector. In this classification, consumption means the total value of household consumption expenditure in a country which includes the expenditure on food, fuel, rent, and other household expenditures.
Government spending and investment is nothing more than the total value of all the spending and investment made by the government which includes defense expenditure social development program benefits and salary to public sector employees. On the other had private investments includes the spending of businesses on new projects and plants in the country and the household property investment. Where exports show the number of exported goods which is produced In the country and exported to other countries.
Foreign Exchange Trading and GDP reports
Gross domestic product report holds a lot of weight and is one of the most important reports for currency traders. The Gross domestic production report not only gives a strong evidence of growth in a productive and growing economy but it also helps a trader to analyze the future growth of an economy which helps them in placing a strategic position in the Forex market which can yield profits for long-term as well as on short-term basis. A constant growing GDP number clears the way for the interest rates hike which in turn supports the domestic investments and foreign fund flow and this dynamics can further support the GDP growth. Higher GDP and a supportive monitory policy help the domestic market to flourish further and this circle helps an economy to perform constantly good in the long term.
There are three types of GDP reports advanced, preliminary and final GDP reports and all the GDP reports are important for a currency trader but most of the movement and speculations come in the market at the time of the advance GDP reading and because of that professional currency traders keeps a keen eye on these readings to assess the direction of the market more specifically.
How to read the GBP
There are three directions where the GDP report can go and the market can react or give a response to the reading accordingly:
1. A lower than expected GDP reading: this type of data usually results in a sudden bearish movement in the currency pair associated with the related economy. The selloff in the domestic currency pair not only happens because of a fresh flow of the funds in the market but also panic selling plays a very important role in the movement of the currency pair at the time of a lower than expected GDP report the market tends to suddenly turn bearish which results in a big bearish movement in the majority of times. The deviation between the expected and actual result determines the level of volatility and how bit the selloff with push the price down.
2. A higher-than-expected reading tends to give a positive push to the underlying currency versus other currencies. A higher U.S. GDP figure tends to give the bulls the power to dominate the market movement which will benefit the U.S. Dollar against counter currencies. In this case also the higher an actual GDP reading is, the sharper and higher the movement in the market.
3. An expected reading is the most complex data as it requires a lot of research and analysis by the Forex players. In this case, the analyst is usually based on the comparison of the current reading to the previous quarter’s reading which will give a direction to the trade. This way, a growing number given this investor and traders a positive outlook which can push the price to the bullish territory and a negative number compared to the previous quarter may result in a correction in the underlying currency.
The Bottom Line
The Gross domestic product (GDP) report is a highly important data for the forex players it not only reflects the health and growth of the economy but also shows the level of growth and speed of recovery which makes this report a highly reliable and market-moving report when comes to foreign exchange trading as the traders need to understand and read the GDP report and interpret the impact of this data and apply its relevance to get into a profitable trade and stay on top of other players.