Economic data releases are essential for each forex trader, especially reports of utmost importance like the GDP (Gross Domestic Product) of a country, which reflects the overall state of the respective economy. Market players monitor this critical piece of economic data to either enter a new position or add to a current one, but in most cases, they use it in combination with other trend-defining factors. GDP represents the total monetary value of all goods and services produced over a specific time period – the size of the economy.
GDP measures the total amount of consumer spending, investment spending, international trade and government spending within a country over a certain period of time. It essentially measures the total production of goods and services for an entire country. GDP is mostly measured on a quarterly or annualized basis. If the GDP growth rate is high, then the economy is considered to be robust and the currency will likely appreciate in value. If the GDP growth rate slows, then this can be seen as a weakening economy and the currency is likely to depreciate.
When trading the GDP report, traders should pay special attention to the advance report as it is the most market-moving release of all GDP reports. The usual impact on the currency market is positive for the domestic currency when GDP rises more than expected and negative if it fails to exceed market expectations. Being a quarterly release, traders try to predict the GDP report by tracking leading indicators like personal consumption and the housing market.
As one can imagine, economic production and growth (what GDP represents) have a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market and that nation’s currency. If the US came out with a positive GDP figure it would be expected that the US dollar would rise as the economy strengthens.
It is important to understand that there is a lot of economic data released that has a significant impact on the forex market. Interest rates, inflation, and GDP are the three main economic indicators employed by forex fundamental analysis. They are unmatched by the amount the of economic impact they can generate compared to other factors such as retail sales, capital flow, trade balance as well as bond prices and numerous additional macroeconomic and geopolitical factors.