The GDP announcement is a source of volatility in the Forex market, and traders all around the world analyses every data to place trades and to make money. But how we can trade GDP in Forex and make decent profits?
As the GDP is the most important economic release in a country, it definitely affects the direction of a currency. Keep reading and learn how to trade the GDP and how to take profits of the movements caused by the volatility post releases. Also, understand how don’t get burned at the attempts.
Why trading the news
First of all, let’s talk about why investors like to trade the news. The answer is easy and neat: Because of the volatility that key economic reports can product in the Forex market.
People who trade the news are generally fundamental analysis followers, but most of the cases they do not follow only fundamental strategies. They also use technical indicators to find point entries, exits, etc.
As currencies are commodities representing the economy of a country, economic releases are numbers that report about the state of the economy of a specific country or region.
So, trading the news is a natural condition for traders who believe that currencies represent the value of each economy. Trying to catch the moves after a release can provide a lot of pips, but also it entails high risks.
But we love risks, right?
What is Gross Domestic Product
Gross Domestic Product represents the total market value of the economy in a particular country or region. It includes data such as goods, services, and structures produced by the country in a specific period of time.
It is generally released every quarter and has a quarter and annualized readings to measure changes between periods. It shows the pace at which the economy of a country is growing or declining. Some nations also report the monthly change in GDPs.
When a GDP post two consecutive declining periods, also named as negative growth, it is called a technical recession.
The US Bureau of Economic Analysis uses the “Expenditure Approach” to formulate the GDP:
GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports (X) – Imports (M)).
That being said, every country has its own way to measure Gross Domestic Products.
How the GDP announcement affects currencies
GDP releases have an overall number but also provide specific components. Traders make decisions based on the numbers they read in the report. However, what really moves the Forex market is the expectation associated with that release.
We trade expectations and the difference between what we anticipated and what we finally get. So, there are three possible scenarios: a bad number, a good number, and a number in line of expectations.
Lower than expected GDP
A weaker than expected GDP occurs when the market anticipates a number, but the release came short and couldn’t match that figure. It will result in the selling of the currency of the giving country. Lower GDP signals that the economy of the country is not doing well and the money, for instance, loses appealing to investors.
Higher than expected GDP
A higher than previously anticipated number represents that the economy has done better than expected by the market. So, the country is living shining days and a healthy economy. A better than expected GDP will provoke purchases of the currency of that country.
A GDP in line of expectations
It is a number that matches what experts previously anticipated. Generally, it won’t have much impact on the market, but investors will read the fine print in the report. So pay attention beyond the headline and watch data more in-depth.
Long story short, traders buy currencies of countries with strong GDPs but sell the money of states where the GDP is not doing well.
Also, the wider the difference between expectations and actuals is, the more violent the movement will be.
Most popular GDP releases in the world
As there are superpowers in the world, advanced economies, and regions, not all GDPs are equals. Here comes the more important Gross Domestic Products in the world.
US GDP and the USD
The US Bureau of Economic Analysis releases the Gross Domestic Product report in the United States. It is published with two preliminary numbers and one final reading. USA announces the number in a quarter and annualized forms, where the quarter is a period of three months, but the annualized is the number of the quarter multiplied for four.
A higher than expected GDP will be bullish for the US Dollar, while a weak GDP will send the dollar down. Generally, GDP affects more USD/JPY, EUR/USD, and GBP/USD.
Eurozone GDP and the EUR
The GDP in the eurozone is the Gross Domestic Product of the 19 countries member of the European Union and use the euro as official currency. Those countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Eurostat publishes the GDP, and it is a measure of the total value of all services and goods produced in the eurozone.
Usually, a good GDP will fuel the euro to the upside; while a lower than expected number will push the single currency down. Investors love to trade EUR/JPY, EUR/USD, and EUR/GBP when the EUR GDP is published.
China’s GDP and the world
The Chinese Gross Domestic Product is released by the National Bureau of Statistics of China and studies the total value of the economy in China. The value of the GDP in China represents around 22% of the world economy, and it is the second largest economy in the world after the United States.
Investors don’t trade the GDP against the Chinese Yuan, but as an indicator for the global economy healthy. A firm GDP number in China will fuel sentiment, purchases of equities, and riskier currencies. However, a weaker China GDP will fuel risk aversion and safe havens such as gold and oil.
Traders who follow the Chinese GDP usually trade AUD/USD, USD/JPY, and GBP/JPY.
Thanks so much for the article. I just started trading Forex and this really helps put things into the right perspective.
I’m just hoping that US GDP continues to stay in growth mode. I would hate to see another recession. Last time was not fun!
I really think we will see a large drop in GDP at some point next year due to the continuing trade war. I’m predicting a recession in 2020 or maybe 2021.
GDP growth worldwide has been slowing down as of late. I wonder what this means for the ZAR. Anybody have any ideas?