The other economic indicators that impact the value of a currency
The unemployment rate
The unemployment rate measures the percentage of the labour force that is seeking employment.
A low unemployment rate encourages investors to seek investment opportunities in the country, because it is a sign that the economy is in good health and it typically causes the currency's value to rise. Conversely, when the unemployment rate increases, investors are more inclined to invest in other countries, which in turn weakens the currency.
Gross domestic product (GDP)
GDP measures the total amount of consumer and investment spending, international trade and government spending in the country over a specific period of time. It basically measures the total production of goods and services in an entire country. GDP is mainly measured on a quarterly or annual basis.
If the GDP growth rate is high, the economy is considered to be robust, so the currency is likely to appreciate in value. If the GDP growth rate slows down, it can be interpreted as a sign of a weakening economy, so the value of the currency is likely to decrease.
Economic growth forecasts
Government agencies, as well as investment banks and economic think tanks, publish growth forecasts that provide investors and forex traders an estimate of the future GDP.
When these estimates are published, they often affect currency values. In general, the GDP is estimated for the next two years. Low growth prospects have a negative effect on the value of a currency. High growth prospects have a positive effect.
Retail sales
Consumer spending often represents a large part of a country's economy. It's a significant economic indicator for the measurement of the total amount of consumer spending in various sectors such as: electronics retailers, restaurants, car dealers, etc.
Strong growth in retail sales indicates that consumers are confident and they have extra income to purchase goods and services. An increase in retail sales therefore has a positive effect on the currency.
Home sales
The housing market is one of the most visible signs of an economy's growth. Home sales are measured by:
- Sales of new homes
- Pending home sales
- Construction starts
- Building permits
These reports are influenced by consumer confidence, mortgage rates and the overall strength of an economy. Housing figures show a clear sign of the strength of an economy - therefore, an increase in home sales has a positive impact on a nation's currency.
Trade balance
The trade balance report compares a country's exports and imports over a given period. A country has a trade deficit when its imports exceed its exports, or a trade surplus when its exports exceed its imports.
A trade deficit decreases the value of a currency, because in order to import foreign goods, the local currency must be converted into the currency of the country where the goods originate.
A trade surplus has a positive effect, because the foreign currency is converted into the national currency in order to purchase goods and services, thereby increasing demand for the local currency.
A change in the trade balance is also important.
If these figures change from the last published report, this can also influence a currency. An increase in the trade deficit has more impact on the devaluation of a currency that the ratio of the deficit alone. The opposite effect occurs when a country increases its trade surplus.
Key points to remember
- A higher level of unemployment has a negative effect on the value of a currency.
- An increase in GDP has a positive effect on the value of a currency.
- An increase in retail sales has a positive effect on the value of a currency.
- An increase in housing sales has a positive effect on the value of a currency.
- A negative trade balance is likely to reduce the value of a currency.