Which Economic Reports Should I Follow for Fundamental Analysis When Trading USD?
As the world’s reserve currency and by far the most commonly traded currency worldwide — featured as one half of every major currency pair — the US dollar (‘USD’) is a mainstay of the forex arena.
In fact, it’s thought to be used in around 90% of all forex trades each and every day, so it’s no surprise that many investors spend a lot of their research time trying to discern the USD’s most likely direction of travel across the markets.
There are countless pieces of information you could consider as part of your fundamental analysis — but to help you get started, let’s take a look at perhaps the five most important reports you’ll want to keep an eye on if you want to trade the US dollar more wisely:
Gross Domestic Product (GDP)
Gross domestic product (GDP) data compiles the monetary value of all finished goods and services a country has produced, which have been purchased by an end user, within a given timeframe.
Often considered the broadest measure of an economy’s strength, a high GDP per capita is indicative of a productive and prosperous society; economist and social scientist Philipp Lepenies has touted the GDP as ‘the world’s most powerful statistical indicator of national development and progress’.
The official US figure is released by the Bureau of Economic Analysis (BEA) approximately one month after the end of each quarter — in addition to an annual round-up figure for each calendar year — and is devised via an assessment of trade flows alongside a comprehensive survey of retailers, builders and manufacturers to gauge the general sentiment and success of their respective sectors.
As a useful, wide-ranging benchmark of a country’s economic performance, an optimistic GDP data release usually correlates strongly to the positive performance of the US dollar (i.e. a rising GDP tends to lead to a rising USD), with the opposite scenario also being equally true.
However — and perhaps surprisingly — because of the sheer amount of time the GDP reports take to compile and publish, their overall effect on the market is often not as impactful as some other, lower-profile indicators. This is because much of the data that factors into the final score is already known to investors by the time it is released, so predictions are usually fairly accurate; as such, dramatic market movements only really occur at times when the official reading is noticeably different from market expectations.
Further reading: https://www.sparknotes.com/economics/macro/measuring1/section1/
Nonfarm Payroll (NFP)
Produced by the US Department of Labor’s Bureau of Labor Statistics (BLS) each month, the Nonfarm Payroll (NFP) Employment Report highlights the number of jobs added and lost to the US economy on a monthly basis.
The NFP report is typically released on the first Friday of the month (containing data for the previous month) and comprises jobs statistics from goods, construction and manufacturing companies across the US. As the name implies, though, it does not take into account farm workers; private household employees, some government workers and those who work for non-profit organisations are also not included in the data.
This report is a key economic indicator as it serves as a reliable yardstick of the American labour market as a whole and the forex markets are often very volatile around the report’s release date, with subsequent reactionary movements usually being very swift.
A strong NFP showing historically correlates very closely with the strength of the USD (and vice versa); if more employment opportunities are being created, it is usually taken as proof of a healthy rate of economic growth across the country.
This positive momentum can also often lead to interest rates being raised, which naturally makes the US a more attractive prospect for investors, in turn leading to increased investment activity and a spike in demand for the US dollar worldwide. However, the opposite is also true, and a downturn in the jobs market can often cause interest rates to drop, thereby reducing demand for the USD and contributing to a more bearish outlook.
Further reading: https://www.ofeed.com/Education/The-US-NonFarm-Payrolls-Explained
Retail Sales
Officially known as the ‘Advance Monthly Sales for Retail Trade’ report, the Retail Sales data gives an aggregate measure of the nominal dollar value of retail goods sold (without adjusting for inflation) during the month in question, noting the change in either direction as a percentage figure.
This report is monitored closely by many speculators as it pertains to what’s known as personal consumption expenditures (PCE) — e.g. tangible purchases made by individuals and households on goods, as opposed to more abstract financial activity such as large corporations moving money around — which are an indispensable component of a country’s economic growth.
The statistics are released by the US Department of Commerce’s Census Bureau two weeks after the relevant month, and in a similar manner to the two above indicators, a strong performance correlates to an appreciation in the USD.
It’s worth noting that strong retail performance has the potential cause an increase in prices, which has the knock-on effect of spurring inflation — this is something that bodes well for the US dollar (within reason) but can prove detrimental to the stock market!
Further reading: https://www.thebalance.com/u-s-retail-sales-statistics-and-trends-3305717
Industrial Production
Industrial production data simply charts the change in raw output levels within the industrial sector of a country’s economy on a monthly basis. The figures encompass mining operations, factories and electrical/power utilities, as well as number of more typically ‘manufacturing’ based media entities that are grouped as industrial firms for the purposes of data collection, including newspapers, periodical journals/magazines and book publishers.
Industrial production figures are often indicative of the strength of a nation’s financial situation as a whole, and as such are used by many investors as a barometer of economic growth (or lack thereof).
Moreover, industrial production levels are very sensitive to changes in both interest rates and consumer demand, and therefore — despite only being responsible for a small proportion of overall GDP — they are useful tool for forecasting future GDP performance.
The US Federal Reserve Board typically releases new industrial production statistics, known as the Industrial Production Index (IPI), during the middle of the month (on or around the 15th) for the previous month.
Further reading: https://www.investopedia.com/terms/i/ipi.asp
Trade Balance
Produced collaboratively by the US’ BEA and Census Bureau, the Trade Balance Report highlights the value of goods being imported into the US versus those produced domestically before being exported worldwide; in order words, to what extent is America being a net exporter or importer each month?
This key statistic — the nominal ‘trade deficit’- is the primary focus of the Trade Balance Report, and is measured by the current dollar value of US exports minus the dollar value of the goods being imported. Imports exceeding exports results in a trade deficit, whilst the reverse is indicative of a trade surplus.
Unsurprisingly, a trade deficit tends to weigh on the US dollar as it suggests a higher demand for foreign goods — which are purchased using foreign currencies, effectively weakening the USD’s prominence. A trade surplus, meanwhile, means the dollar is experiencing heavy trade volumes and so adds to demand.
Unlike the other data releases discussed in this piece, each Trade Balance Report covers two months at a time and is usually released around five weeks after the conclusion of the latter of the two months.
Further reading: https://forextraininggroup.com/understanding-u-s-trade-balance-economic-report/#:~:text=The%20US%20trade%20balance%20in,2.6%25%20of%20the%20US%20GDP.
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