Lesson 4 – Economic indicators and their affect on Forex prices
Economic indicators are important to forex traders, as they represent vital data in evaluating the underlying strength or weakness of a currency’s economy. While their use short-term is highly subjective, using them as a gauge for long-term trends can be very effective.
These indicators usually fall into two categories: Trade Indicators and Capital (cash) flow indicators. From an economic perspective this should make sense. Trade and capital flows are two sides of the balance of payments for an economy. The balance of payments for any economy tracks all the money moving in or out of an economy. An increase of money moving out of an economy will be bad for the currency while an increase in the money coming into the economy will be good for a currency.
Trade indicators tell us what is going on with the current account or first half of the balance of payments. Capital flows report what is going on in the capital account or the second half of the balance of payments. All economic indicators will provide information about one side of the balance of payments or the other and sometimes both.