One of the most fundamental indicators of both financial market activity and exchange rate changes is the Gross Domestic Product (GDP) report. At its core, the GDP’s first release and its revisions influence the currency of the nation for which it is released. If the data comes out higher than expected, this is typically considered to be positive news, and the currency will often see a boost in relation to other currencies. On the other hand, when the GDP data is lower than the market expects, it’s typically considered negative news, and the currency will usually drop in value as a result.
GDP is such a commonly used term, with the GDP report being routinely cited. The following builds on the above introduction to further explain what how the GDP report impacts the forex market.
Defining General Domestic Product
The GDP is used as an indicator or a gauge for the health of a nation’s economy. It represents the size of the economy as a whole, or the total value of all the goods and the services that are produced over a specific time period. Usually, the GDP is compared to a previous year or even a quarter. For example, if the 2018 Q1 GDP of a country or nation is up by 1 percent, the economy size has grown 1 percent over that time period. These are just periodic rates of how the economy is holding up, but annual GDP rates are typically considered benchmark figures for economy size.
What Makes Up the GDP Report?
As previously mentioned, the GDP represents the total value of all the goods and services that are produced over a specific time period. In the United States, this can be broken up into four major categories:
- Net exports: Total exports, not including total imports. The higher this number is, the more productive the economy.
- Consumption: Household consumption expenditures, such as food, rent, fuel, and personal spending.
- Investment: Business expenditures, such as new equipment, plants, and household investment in properties.
- Government expenditures and spending: Total government spending, including things like public defense, employee salaries, and social programs.
The total and final sum of these numbers is the GDP for the United States, and can then be compared to another year’s GDP in order to see a percentage of growth (or fall) over that period of time.
What Impact Will the GDP Report Have on the Forex Market?
Lower-than-expected GDP reading
If the GDP reading is lower than expected, traders are more likely to see a sell-off of that particular domestic currency in relation to other currencies. In the case of the United States, lower GDP rates signal an economic depression and will more than likely hurt the chances of an increase in U.S. interest rates, which then lowers the attractiveness or overall value of the USD and USD-based assets. The farther a GDP reading is below the estimate, the steeper the decline of the currency.
Expected GDP reading
GDP readings that come out as expected require a bit more attention from the forex trader. The trader will want to compare the current reading to the previous quarter’s or year’s reading and gather better insight into the situation of the economy of the currency in question. The resulting action of the price will therefore tend to be mixed, as the market takes time to sort out the situation and the details of the report.
Higher-than-expected GDP reading
GDP readings that come out higher than expected will more than likely strengthen the currency in relation to other currencies. For example, a higher United States GDP rate will benefit the dollar, meaning the USD will appreciate in comparison to other currencies. The sharper the rise of the GDP, the sharper the rise of the dollar’s value.
Any active trader will be required to process countless reports over the course of the financial year. While most will carry importance, the Gross Domestic Product is arguably the most pivotal. Reflecting the power and economic stability of any country, it can heavily impact the forex market in both directions. Put simply, when the GDP report is released, you will want to pay attention.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.