In Forex trading, investors utilize fundamental analysis to help make those all-important trade decisions. This type of analysis looks at various economic indicators (and political ones as well) to help determine trends in the Forex market, which can then be utilized in developing Forex market strategies. Without this knowledge, Forex trades would be made in a vacuum, which could ultimately spell trouble. These vital economic indicators can be divided into three main groups, as shown below.
Leading indicators are exactly what the name suggests – they lead, or predict future events before they actually occur in the economy. It’s the stuff that economists love to use to make those famous economic predictions that you often hear in the news. In other words, if a leading indicator shows decline, then the economy will often decline. If, however, a leading indicator suddenly improves, then the state of the economy will probably improve.
So what exactly are some common leading economic indicators? A few of the tops ones are the U.S. housing market (specifically new home sales, building permits, and housing starts) and stock market returns. For instance, if new home sales plummet in three straight months, it could signal a trend that consumers will be spending less overall, for such things as home furnishings and mortgages. That, in turn, would negatively affect the economy, and eventually a nation’s currency exchange rate.
These types of indicators lag behind changes that occur in the economy. Even though it might seem pointless to monitor these kinds of indicators (since the economy has already turned), they are valuable for confirming trends. For example, one of the more important lagging indicators, the unemployment rate, might show a positive change only three or four quarters after an improvement in the economy. This would then certainly confirm a continuing positive trend in the economy.
Coincident indicators occur about at the same time of an economic change. They don’t predict or confirm economic events. However, they can still be useful in confirming a particularly new economic movement or event in its first few weeks. An example of a coincident indicator is personal income: a higher than average personal income would coincide with a strengthening economy. The Gross Domestic Product (total market value of goods and services for a country) is another example of a coincident indicator.
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