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How does consumer sentiment impact forex?
Written by: PaxForex analytics dept - Tuesday, 09 December 2014 0 comments
Trading psychology plays a crucial factor when it comes to trading and often is the biggest obstacle for traders to successfully manage. Many traders continue to lose money in forex because they fail to manage their own trading psychology. It is in our human nature that emotions are part of our daily life and often emotions guide actions. When it comes to forex trading it is a fatal mistake to allow emotions to guide trading decisions as this will in most cases lead to losses.
When it comes to economic performance many developed economies heavily depend on their domestic consumers to provide an engine of growth. For example, in the US the consumer accounts for roughly two-thirds of economic activity and therefore requires a healthy consumer in order to keep positive momentum. This directly impacts the US Dollar as a strong consumer translates into a strong economy and therefore into a stronger US Dollar.
Just as many forex traders are impacted by psychology and emotions so are consumers, but to an even greater extend. A happy consumer is more willing to open their wallet and spend their cash on goods and services. This creates demand and
therefore constrains supply which needs to be increase in order to meet demand. The more consumers spend the more demand they create which allows companies to create more supply and the economy will continue to grow and expand.
The stronger an economy performs, which can be gauged by GDP reports, the stronger the currency performs. Consumer sentiment reports are meant to give traders an idea of how consumers feel. This is conducted through household surveys and the responses are then computed into a numeric value. The general idea is that the stronger consumers report they feel about the economy that the more they will spend. This means a better reading in consumer sentiment reports often follows by rallies in the respective currency.
Some argue that consumer sentiment reports should be viewed as a contrarian indicator. This means a weak consumer sentiment report indicates an increase in spending while a strong consumer sentiment reports indicates a decrease in spending. The reason behind this is that consumers often do the opposite of what they claim and give false responses to the surveys. This can explain why a currency may drop sharply despite a strong consumer sentiment report.