A Complete Overview of GDP and Its Impact on Forex Trading
Gross Domestic Product, in its short form, GDP gives an economic print of a country as it measures the size of its economy and growth rate.
Gross Domestic Product (GDP) as defined by Investopedia refers to the value in monetary terms of all finished goods and services made in a country within a timeframe. It is also inclusive of government and public spendings.
The GDP figure which is most often expressed as a percentage can be arrived at in 3 ways: using expenditures, production, or incomes. It can also be modified to cater for inflation and population. This is often done to give greater understanding. The basic blocks which go into GDP calculation are public and private investment, personal and public consumption, government spending, and exports (reduced imports).
GDP representation is in either of two ways: nominal GDP and real GDP. The difference between the two is the inflation factor. Nominal GDP is devoid of inflation or deflation while real GDP on the other hand takes inflation into account. Real GDP is a more preferred method to compare a country’s economic growth rate as it accounts for the overall increase in price levels.
GDP is often reported annually although some could be done quarterly. For instance, the United States does its reporting quarterly by the Bureau of Economic Analysis (BEA). Quarterly GDP figures are periodic checks on how the economy is faring but yearly GDP figures are often regarded as the standard gauge for the general size of the economy.
Impact on the Forex Market
Forex trading refers to the process of exchanging one currency for another, known as buying or selling currency pairs, based on prevailing exchange rates from the forex market. The forex market is open 24 hours a day, five days a week.
In Forex Trading, you require an online trusted broker which is pivotal to trading success. The choice of Forex Broker is mostly determined by the specific needs of the trader/investor about which platform, tool, or research requirements are required especially if you are a beginner or pro. A simple knowledge of investment style may also be essential.
GDP is often reputed as one of the most keenly monitored basic fundamental indicators as its impact at the aftermath of initial release and revisions can lead up to notable financial market activity and exchange rate swings. This is because GDP levels have a say in the monetary policy decisions made by a country’s central bank is a fundamental economic indicator for the strength of a nation’s economy.
GDP Figures Can Be Applied in Forex Trading in Two Ways
*A lower than expected GDP figures will probably increase the likelihood of a selloff of the domestic currency relative to other currencies.
*A higher than expected GDP readings will most likely strengthen the underlying currency relative to other currencies.
However, it’s essential to state that because GDP reflects the status of the economy in the previous quarter or year, it is better suited to deduce how the economic growth and production have affected past trades and investments. Therefore it may not be the most suitable indicator of how the market will behave in the future.
In Conclusion, the GDP growth rate can be quite a predictor of inflationary activity in the country, yet most central banks use interest rates to control inflation. Inflation, on the other flip side, has a very huge effect on a currency’s value.
For example, imagine that the nominal GDP of a nation is progressing upwards at an unprecedented rate. This is not always a positive sign, and it may mean that, with the growth patterns of that country, everything is not going as projected.