The Gross Domestic Product (GDP) is one of the most closely studied basic indicators by forex traders.
Economists frequently use GDP data to gauge the amount of growth and economic health in the US economy. It stands to reason that while it is significant for economists, it is also crucial for financial markets, especially FX currency pairs including the dollar.
According to the Bureau of Economic Analysis’ (BEA) one-page explainer The Making of GDP, it “aids Americans in recognizing historical trends, making economic estimates, and comparing their economy to that of other countries.”
According to the Bureau of Economic Analysis, GDP is the market value of all products and services generated by labor and property in the United States, which was more than $21 trillion in 2019. When discussing and describing GDP fluctuations, though, individuals are more likely to use a percentage the pace at which GDP grew (or declined) from one quarter to the next. According to the BEA, “The most carefully monitored economic indicator in the United States.”
The data is acquired by many agencies at various periods, and the BEA makes appropriate adjustments to guarantee that the data is consistent.
What level of growth is a healthy economic signal?
The majority of experts feel that GDP growth of between 2% and 3% on an annualized basis is an indication of a strong and healthy economy. A lower outcome may necessitate stimulus measures to stimulate the economy, whereas quicker growth may raise inflationary concerns.
Almost every country calculates its GDP, allowing economies from different jurisdictions to make significant conclusions when comparing their performance to that of other countries.
According to the BEA, there will be 19 times in calendar year 2021 when Gross Domestic Product data for the United States will be released. The cycle began on January 28, when the 4th Quarter and Year 2020 Advance Estimates were released at 8:00 a.m. Eastern Time, and ended on December 23, when the 3rd Quarter GDP by State was released.
The complete timetable may be seen on the Bureau of Economic Analysis’ website, and many forex traders will mark the specific dates on their digital calendars to assist them plan and direct their activities.
The BEA releases the data on a quarterly basis, four weeks following the conclusion of each quarter. With the final GDP figures released three months after the relevant quarter ends, there are further adjustments and revisions.
GDP data triggers three types of price action
When GDP data is announced, the price movement that a trader might expect to see can be divided into three groups.
- A weaker dollar will almost certainly result from a lower-than-expected GDP report, putting pressure on the dollar side of all important currency pairs. If the GDP number is much out of the predicted range, this will be amplified, potentially causing even greater volatility.
- A forex investor must carefully analyze a reading that falls within the expected range. There is unlikely to be any spectacular action in this scenario. A trader will want to compare the current reading to the previous quarter’s reading, as well as the same quarter from the previous year’s, and to compare US data to current data from other nations.
- A number that is higher than predicted will almost certainly contribute to trading support for the dollar against other currencies. As with point 1, the higher the GDP reading, the more room for protracted dollar advances despite volatile charts.
How long-term GDP patterns dictate general price moves
Unlike trading on NFP data, which often prompts traders to take precise action, much of the published advise on GDP data encourages traders to take a broad perspective of important currency pairs rather than looking for a quick profit.
To that purpose, it’s worth taking a look at some historical instances of long-term GDP patterns, starting with the chart below.
Prior to the global financial crisis of 2007-08, the Euro zone was in a better situation than the United States. Both economies went into recession, but the US yearly GDP growth rate surpassed the European average from 2009 to 2015.
Now let’s look at how the aforementioned data converts into the real trading pair in question. The chart below depicts the euro’s continuous rise versus the dollar prior to the financial crisis. This occurred first because GDP was rising in Europe while declining in the United States, and when it did decrease, it did so only slightly. The impacts of the financial crisis were exacerbated in the United States, allowing the dollar to reach an all-time high in July 2008.
However, as soon as it became clear that the financial crisis would be just as disastrous for the Euro zone as it had been for the United States, it became plain that the euro was an overbought currency, as evidenced by the chart’s precipitous decline.
From that moment until 2014, the situation was characterized by significant volatility, which was exacerbated by distinct geopolitical and financial problems in Europe. The debt crisis in Greece in 2010-11 was followed by severe banking issues in Italy, Spain, Ireland, and Portugal.
Returning to the GDP comparison graphic, from 2012 to 2015, the US results were continuously solid (unlike in Europe). This was a major component in the euro’s sharp depreciation, which saw it fall from 1.39 in May 2014 to 1.26 in October of that year.
How should forex traders react to GDP data?
It’s difficult to make blanket statements about how a trader should react to certain pieces of GDP data. When most of the data is revisions of earlier data or widely signaled in advance, there is frequently a limit to how much surprise factor there may be.
Having said that, there will be situations when the data prompts an urgent response. Consider a scenario in which the economy is struggling to grow and GDP data has been disappointing for several months.
Buying dollars in several significant trading pairs will be the immediate market reaction, lasting up to a few hours. Given the latest data, some traders will undoubtedly believe the currency has been oversold and hence offers value.
Those traders will be hoping for high prices in the short run. However, following an initial rally, the currency’s price rise may diminish and finally return to levels seen before to the announcement of the GDP report.
It’s critical to recognize that one release of GDP data, while significant, is insufficient to change the broader underlying image of the currency’s economy.
Furthermore, favorable data that meets expectations is rarely a bullish indicator for a currency, and may even cause it to depreciate.
Finally, while looking at GDP figures, it may be advisable not to evaluate the dollar’s value in isolation. Other major currencies may have recently delivered similar GDP numbers and may be on the same trend as the US dollar. As a result, comparison graphs of GDP, such as the one displayed in the first image on this page, may be more useful as a reference.
What impact does GDP have on forex?
As a result, a higher US GDP figure will help the greenback, allowing it to appreciate versus other currencies; the higher the real GDP reading, the steeper the gradient of the dollar’s rise.
What does GDP mean?
This article is part of Statistics for Beginners, a section of Statistics Described where statistical indicators and ideas are explained in a straightforward manner to make the world of statistics a little easier for pupils, students, and anybody else interested in statistics.
The most generally used measure of an economy’s size is gross domestic product (GDP). GDP can be calculated for a single country, a region (such as Tuscany in Italy or Burgundy in France), or a collection of countries (such as the European Union) (EU). The Gross Domestic Product (GDP) is the sum of all value added in a given economy. The value added is the difference between the value of the goods and services produced and the value of the goods and services required to produce them, also known as intermediate consumption. More about that in the following article.
Is GDP a currency rate?
Summary. Because GDP is expressed in a country’s currency, we must convert it to a common currency before comparing GDPs from other countries. An exchange rate, or the price of one country’s currency in terms of another, is one approach to compare the GDPs of different countries. GDP per capita is calculated by dividing GDP by the population.
Is GDP a reliable metric?
GDP is a good indicator of an economy’s size, and the GDP growth rate is perhaps the best indicator of economic growth, while GDP per capita has a strong link to the trend in living standards over time.
What’s the best way to exchange GDP?
The trade-to-GDP ratio is a measure of a country’s economy’s proportional importance of international trade. It’s computed by dividing the total value of imports and exports over a given period by the same period’s gross domestic product. It is commonly stated as a percentage, despite the fact that it is considered a ratio. It is also known as the trade openness ratio since it is used to measure a country’s openness to international trade.
What is the formula for GDP?
Gross domestic product (GDP) equals private consumption + gross private investment + government investment + government spending + (exports Minus imports).
GDP is usually computed using international standards by the country’s official statistical agency. GDP is calculated in the United States by the Bureau of Economic Analysis, which is part of the Commerce Department. The System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, and the Organization for Economic Cooperation and Development (OECD), is the international standard for estimating GDP.
What are the three different types of GDP?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
Is a high GDP beneficial?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
How do countries determine their GDP?
GDP is calculated by adding up the quantities of all commodities and services produced, multiplying them by their prices, and then adding them all up. GDP can be calculated using either the sum of what is purchased or the sum of what is generated in the economy. Consumption, investment, government, exports, and imports are the several types of demand.
What causes a currency’s value to depreciate?
A reduction in the value of a currency in terms of its exchange rate versus other currencies is known as currency depreciation. Economic fundamentals, interest rate differentials, political instability, and investor risk aversion can all contribute to currency devaluation.