You might have heard economists and policy experts discuss the size of the economy. Most of the time, they are talking about the important indicator of economic growth; Gross Domestic Product. So, why should you care about GDP? First, GDP is a mainstream measurement of all goods and services produced over a specific time in a given country. It is used by fundamental traders and economists to measure the growth level and economic health in a country.
How GDP Affects Currency Exchange Rates
If you are involved in international money dealings, then you are aware that currency exchange rates play a vital role in your choices. The level of GDP in an economy has a significant impact on the country’s monetary decision. As a result, the GDP data release prompt substantial forex funding movements, as it significantly influences the stock market and bond prices.
Prop forex trading platforms prefer investing their money in countries with high GDP growth rates. When GDP data in a country is higher, this is positive news to various organisations funding traders in that nation. The currency subsequently appreciates than other currencies, and the benefits trickle down to consumers, increasing their spending and consumption likelihood.
When the GDP data lowers, it is an indicator that the economic growth is either stabilizing or slowing down. If it drops further to negative digits, it has negative impacts on the nation’s currency, which will subsequently lead to loss of purchasing power, reduced forex funding, productivity, and loss of jobs.
Impacts of GDP on Forex Markets
GDP is one of the indicators mostly monitored by forex traders since the release can result in significant financial market activities or exchange rate fluctuations. Markets tend to move actively after GDP data release, and the volatility rises depending on how favourable the actual results come in relation to the predicted rates. Note that GDP reports don’t always have the same expected financial outcome since they are affected by different factors. Seasonality plays a vital role in GDP reports; for instance, harsh winter periods drag down the GDP data in the US.
When GDP is higher than expected, most probably, the currency of that country will strengthen in comparison to other countries, this is favorable to most prop forex trading platforms. The higher the GDP reading is, the sharper they incline in currencies’ appreciation.
If the GDP comes out as expected, the funding traders platform will have to be more cautious by comparing the current data release to the previous for a better evaluation of the situation. Markets might take considerable time to sort out the details; therefore, you can expect a more mixed price action.
A lower than expected GDP reading; will result in a depreciating domestic currency relative to other currencies. For instance, lower GDP in the US signals economic depression, lowering the attractiveness of USD – based assets.
GDP reflects the power of the economic stability of any country, which impacts the forex market. It is, therefore, crucial for traders to monitor financial data release and adopt sound risk management policies.