“The rise and fall of a country’s GDP directly affects how its currency behaves in the Forex market.”
The fourth event that a Forex trader should watch out for is the Gross Domestic Product, as it is an important economic indicator in the economic health of a country. The Central Bank of every country, always have expectation in the level to which it expects the county’s economy to grow each year, which is measured by the GDP.
The Central Bank uses three ways known as the product (or output) approach, expenditure approach and the income approach, which should theoretically yield similar results to determine the GPD.
If the GPD of a country rises, there will be an expansion of business, as companies will hire more staff to keep up with the growing demand for products and services. The country will often witness more exportation, which in turn will improve the country’s business cycle.
If the GDP of a country falls below what it is expected, it affects the value of the currency negatively. On the other hand, if the GDP shows indication of growth beyond what is expected, it also increases the currency value. As a currency trader, you should keenly observe these figures, which you can use to anticipate Central Bank’s movements.
An example was in November 2014, when the GDP of Japan shrunk to about 1.6%, the Japanese yen also lost some value against the US Dollar while anxiously waiting for more intervention from the Central Bank. Similarly, in July 2014, the US economy shrank by 2.1%. This in turn affected the Dollar rate, which traded at a much lower rate than the Sterling.