Trading GDP Like A Currency Trader

Economic data reports are essential for a foreign exchange (forex) trader. These important economic indicators create volatility, and plenty of speculation is always surrounding them, and The United States' gross domestic product (GDP) is one such report. Not only do forex (FX) traders continue to monitor this important piece of economic data, they use it to either establish a new position or support a current one.

Gross domestic product is simply the total market value of all goods and services produced in a particular country. Gross domestic product figures can be released on a monthly or quarterly basis. For the United States, releases final quarterly domestic figures – along with additional advanced or preliminary figures toward the end of each month. This report can also be released in either real or nominal conditions.

Trading the Foreign Exchange Markets
Like any other piece of important economic data, the gross domestic product report holds a lot of weight for currency traders. It serves as evidence of growth in a productive economy while signaling contraction in a withering one.

What Investors Can Expect
There are three basic reactions to price action that a trader or investor can reasonably expect:

1. A lower-than-expected GDP reading will likely result in a selloff of the domestic currency relative to other currencies. In the case of the U.S., a lower GDP figure would signal an economic contraction and hurt the chances of a rise in U.S. interest rates – lowering the value or attractiveness of U.S. dollar-based assets. Additionally, the further below an actual GDP reading is from the estimate, the sharper the decline in the dollar.

2. An expected reading requires a bit more comparison by the FX investor. Here, the analyst or trader will want to compare the current reading to the previous quarter's reading – maybe even the previous year's reading. This way, a better evaluation of the situation can be gathered. Given this factor, you can expect that the resulting price action will tend to be mixed as the market sorts out the details.

3. A higher-than-expected reading will tend to strengthen the underlying currency versus other currencies. Therefore, a higher U.S. GDP figure will benefit the greenback, lending to some appreciation in the U.S. dollar against counter currencies; the higher an actual GDP reading is, the sharper the incline of the dollar's appreciation.