GDP, or Gross Domestic Product, is one of the most important economic indicators for forex traders, and all the major nations publish GDP data on a regular basis. The release of GDP data can have a major impact on the value of a nation’s currency, and therefore its exchange rates to other currencies on the forex market.
As is the case with most economic indicators, the GDP number coming out of the USA is the one that has the biggest market impact, due to the fact that the US dollar is used in the vast majority of currency transactions, and is a component part of all the major currency pairs. The GDP numbers released by other nations will usually have an influence on the value of that currency against the US dollar, and therefore the cross-rates between its currency and those of other non-US countries.
What is GDP?
The Gross Domestic Product conveys the value of all finished goods and services produced by a country within a specified period of time, including government purchases, the nation’s trade balance, investments and all public and private consumption that occurs within the nation’s borders.
Although the number is usually calculated on an annual basis, most countries will release their GDP numbers every quarter, and the forex market tends to look at the percentage change in GDP over a certain time frame, rather than the raw data.
The US GDP is released in two parts at the end of the quarter, the Advance GDP (released four weeks after the end of the quarter) and Final GDP (released three months after the end of the quarter). Along with these is published the annualized percentage change, which is the change for the quarter multiplied by four.
The GDP is calculated using a wide number of other fundamental economic indicators including Retail Sales, Wholesale Inventories, and Personal Consumption, Gross National Product or GNP, the Current Account, and the nation’s balance of trade.
GDP in the Forex market
GDP is one of the most widely monitored economic indicators by forex traders, and any significant revisions or deviations from the consensus forecast can have a major impact on the forex market. As one of the key measures of the health of an economy, it also reflects the standard of living in that country, and is therefore one of the most important economic indicators for any country.
As companies hire workers and expand to meet increasing demand for their products, the GDP rises. GDP growth of 3%-3.5% is considered to be the mark of a healthy economy, with enough growth to keep things ticking over without signalling an excessive inflation risk. A declining GDP tends to signal an economic downturn, with lower demand for products, increasing unemployment and a slowdown in the business cycle. It is also a sign that the economy is headed for recession, with many analysts using two quarters of negative GDP as the benchmark for a recession.
As a general rule, if the US GDP comes out higher than expected, it will drive the US dollar higher, while if it comes out lower, it will have a negative impact on the value of the US dollar relative to other currencies.