GDP in Forex data release makes the market go volatile due to a lot of speculators waiting up on the news release
A country’s Gross Domestic Product represents the total value of all goods and services produced with in the country for a given period of time.
It involves consumption, government expenditures, investments and net exports/trade balances (exports-imports).
The Gross domesitic product can be calculated by the formula
C + I + G +( X-M)
where by
C – Consumption
I – Investment
G – Government expenditure
(X-M) -(Exports -Imports)
GDP in Forex is one of the major economic indicators that measure the state/health of country’s economy.
It is calculated by comparing the last quarters or years figures with the current figures. eg If the country’s GDP is up to 2% this means that it has performed to 2% over the last year.
The country’s GDP is measured in 2 different ways;
- The Nominal GDP
- Real GDP.
1. Nominal GDP
This measures the value of all goods and services at current market price. It includes all the changes in the price that occurred during the year due to inflation or deflation.
The 3 approaches to calculate Nominal GDP
The Expenditure Approach:
This involves summing up the market value of all domestic expenditures incurred on all final goods and services within a single year.
These expenditures include consumption expenditures, investment expenditures, government expenditures, and net exports.
The Production Approach:
With this approach, you subtract the intermediate consumption in production of final output from the total estimated output.
This includes; cost of materials, supplies and services.
The Income Approach:
Here,to get nominal GDP, you take the sum of all income the firms and households earned in a single year.
These are wages, profits, rents, and interest income.
2. Real GDP:
This is the GDP expressed in the base year prices.
Real GDP accounts for changes in the level of prices caused by inflation or deflation.
The country’s GDP assesses the over all state of the economy and this reflects the currency performance in the forex market. This is realesed monthly or quarterly in a year.
GDP is calculated annually but some countries provide GDP estimates monthly or quarterly and the final GDP at the end of the year.
The Investors and traders look at the current and previous quarter to gauge the current performance of the country and also compare productivity of different countries.
The GDP data is published and released by the Bureau of Economic Analysis (BEA) either monthly quarterly or yearly.
How GDP indicator affects the forex market.
GDP indicator measures the growth and contraction of an economy.
When the GDP rate rises, it indicates high economic growth.
This is likely to be followed by inflation and interest rate hike.
High economic growth and interest rates make the currency expensive in value. The forex market become more bullish as most investors buy more of that currency.
On the other hand,
when the GDP rate falls, its an indication that the economy is collapsing.
This may call for the central banks to cut interest rates to encourage domestic expenditure and boost economic development.
As a result the domestic currency loses value and the forex market becomes more bearish. This is because most investors are selling off the currency to buy a higher yielding currency.
How to trade GDP data release
At the release of GDP data, the market normally goes volatile due to a lot of speculators waiting up on the news release.
A higher GDP than expected shows that the country’s economy is doing great compared to the last years.
Therefore a positive signal for a healthy economy. In this case, more traders will invest in the currency.
It is also an indicator that interest rates could also increase soon. Hence future rise in the currency value. More buyers will join the market and price will rise further.
Buy the currency.
However, if the GDP figure is less than expected, it shows that the economy is not doing good.
This represents a weak domestic currency and traders are likely to sell off the currency.
Sell the currency.
Investors and traders compare the countries previous GDP with the current and base on the difference for their future predictions.
If the GDP is positive or exceeds the previous years GDP, the currency strengthens . If it is negative or below the previous years, the currency weakens.
Therefore, looking at GDP rate, you can tell whether the currency pair will rise up or fall.
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