Part III. Fundamental Analysis / Chapter 5. Macroeconomic Indicators

As you have likely come to realize during your study of the material on informational portals, the exchange rate of a national currency is directly influenced by the health of the country's economy. Economic growth generally leads to an appreciation of the currency, while economic downturns tend to result in its depreciation. The economy of a particular country is so vast that analyzing it requires taking into account numerous aspects. These aspects are known as macroeconomic indicators, which represent numerical values in absolute or relative terms.

Each macroeconomic indicator is calculated for a specific reporting period, which can be a month, quarter, or year. The value of a macroeconomic indicator is published at the end of the reporting period. Subsequently, it may be revised as more comprehensive data becomes available and is taken into consideration for analysis.

Each macroeconomic indicator has a strictly defined date and time for the release of preliminary and final values. In addition to this, leading analytical agencies attempt to predict its future value prior to the official release date. As many traders worldwide rely on analyst forecasts, the Forex market adapts to the predicted value of the macroeconomic indicator by the time it is released. If the official value differs only slightly from the forecasted value, the market's reaction at the time of publication is usually subdued. Interesting events occur in the Forex market when the actual value significantly deviates from the forecast. In such cases, a strong corrective movement may occur, which cannot be predicted by technical analysis indicators. That is why novice traders are not recommended to open positions just before the release of key macroeconomic indicators and should always set stop-loss and take-profit levels to avoid unnecessary losses.

Macroeconomic indicators vary in terms of their impact on the Forex market. Some indicators have a significant correlation with currency exchange rates, while others have only a minor influence on currency charts. Traders and financial analysts are often more interested in the relative value of a macroeconomic indicator rather than its absolute value. This is reflected in the comparison of the current value to the value of the previous reporting period, which represents either a growth rate or a decline rate.

At the time of the release, both the absolute and relative values of macroeconomic indicators are published by leading financial publications (such as the Wall Street Journal, Financial Times, and New York Times) and information agencies (such as Bloomberg and Dow Jones Telerate). As a result, the Forex market reacts almost instantaneously to such events. We will learn about the major macroeconomic indicators in the upcoming chapters.

Part III. Fundamental Analysis / Chapter 6. Gross Domestic Product (GDP)

One of the most important macroeconomic indicators is Gross Domestic Product (GDP), which measures the overall economic performance of a country. It represents the total value of goods and services produced within the country's borders, including both residents and non-residents, and is measured at current market prices.

For several countries with a significant presence of national enterprises operating in other countries, a different macroeconomic indicator is used: Gross National Product (GNP). GNP reflects the total market value of all goods and services produced by national enterprises both within the country and abroad. This indicator, for example, is used in Japan.

There are several models used to calculate GDP, and one of the most common is the Keynesian model of economic development. According to this model, the absolute value of GDP is calculated using the formula:

GDP = C + I + S + E – M,

where C represents consumption, I represents investment, S represents government spending, E represents exports, and M represents imports. Consumption is the most important component of GDP, and it can be further divided into three subcategories: durable goods, nondurable goods, and services. In the United States, for example, consumption accounts for over 50% of the total GDP. By comparison, investment in the U.S. makes up slightly over 10% of GDP, and government spending (including social benefits, interest payments on government bonds, and defense expenditures) accounts for about 20% of GDP. The final component of GDP, the difference between exports and imports, is referred to as either net exports or net imports, depending on which is dominant in the country's economy.

In addition to the method of calculating GDP described above, there is also the income approach, which includes the compensation of employees, net taxes on production and imports, gross profits, and mixed incomes. For the sake of simplicity, we will not delve into the details of calculating GDP using this method, but interested readers can find more information in textbooks on economic theory for universities.

When GDP is published, it is expressed as an index relative to the previous period and as an absolute value in terms of the national currency. The relative index value is of greater importance for the Forex market, as it reflects the trend of GDP growth or decline during the reporting period. Typically, there is a direct relationship between the currency exchange rate and changes in GDP. An increase in GDP leads to a strengthening of the national currency (an increase in its exchange rate), while a decrease in GDP leads to a weakening of the national currency (a decrease in its exchange rate). However, it is important to remember that currencies in the Forex market are traded in currency pairs (quotes). Therefore, if both countries in the USD/JPY currency pair show the same percentage increase in GDP for the reporting period, it will not have any impact on that particular exchange rate, as such influences are mutually offsetting.

The reporting period for GDP is a quarter. The GDP value itself is published three times. The preliminary GDP value (GDP Advanced) is released on the last Friday of the month following the reporting quarter at 16:30 Moscow time. The revised GDP value (GDP Provisional/Revised) is published on the last Wednesday of the second month following the reporting quarter at 16:30 Moscow time. Finally, the final GDP value (GDP Final) is released on the last Wednesday of the third month following the reporting quarter at 16:30 Moscow time. Generally, the difference between the final value and the revised value is minimal.

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