The Effects of the US Economic Indicators in Forex Trading

Learn in this article about the main US economic reports and indicators including interest rates, inflation, employment and how they affect the Forex market.

It is important to point out that since 90% of all currency trades are pitted against the U.S. dollar, currency movements, in general, are naturally most sensitive to U.S. economic releases. Many technical traders argue that long-term fundamentals are already represented in price action, but even the most ardent chart reader has witnessed the considerable short-term impact of fundamental releases.

Kathy Lien, in an article entitled “What moves the Currency Markets in the Short Term,” conducts her own study of the EUR/USD range following economic releases for 2004 (table copied below):

Economic ReportFirst 20 Min:
Avg Rng (Pips)
Total Daily Rng:
Avg Rng (Pips)
Nonfarm Payrolls124193
FOMC Decisions74140
Trade Balance64129
Inflation (CPI)44123
Retail Sales43125
Current Account43127
Durable Goods39126
TIC Data33132

Based on her study, Kathy concluded the that the most significant movements in the dollar (against the euro) occurred in the first 20 minutes following an economic release, and that nonfarm payrolls is the most important news release. Towards the end of the article, she indicates that the knowledge of the magnitude and duration of moves following news releases can help traders properly weigh their positions, depending on their trading style.

Breakout traders, for instance, can increase their positions prior data that carries the largest average range, such as the Non-farm Payroll (NFP) event, particularly if the market had been consolidating. Range traders, in contrast, should stand on the sidelines on that particular day and wait for prices to settle. They would be more keen to trade off the GDP release because of its relatively smaller move, a third the pip size to move following the NFP event, and because its 20-minute reaction ranking is higher than its daily ranking.

Knowing the magnitude and duration is helpful, but deciphering the significance of the data quickly enough as it pertains to the direction of the move before the market has already shot beyond your reach, is still a tricky conundrum. Your brain and hand have to digest and react to the news in microseconds. A young, alert person with a sharp mind and fast reflexes can enter a trade within a second or two. But the market probably shot up within the first second after the release, causing that fast trader to lose out on a good percent of the move.

Ideally, you would have had your strategy regarding the news event pre-programmed within an EA, so that if the NFP actual number is 0.2 greater / less than forecast, you would go long or short the US Dollar. This news scalper EA would trump the human in reaction time, perhaps entering into the trade within the microseconds needed. However, even if you could program the best news scalper EA, it might only work on a demo account where you can expect immediate execution. Since 2007, most brokers have added a bit of execution delay (1-10 seconds) on any orders following a news event, causing severe slippage to most real accounts.

Another point in her article, Kathy introduces an important caveat that the significance of economic data releases changes with time. She cites a research paper dated 1992 that indicates that Trade Balance was the number one market-moving U.S release on a 20-minute basis, while Non-Farm Payrolls (and unemployment data) was third.

Then, in 1999, unemployment took the top place while trade balance fell to fourth, and by 2004 trade balance and inflation reports switched places, with trade balance coming in third place. She provides a table to show the musical chairs taking place amongst the US Economic indicators over time, and below you can find a reformatted table to take into account her 2004 findings (rankings based on reaction minutes after data release):

1Trade BalanceUnemploymentUnemployment
2Interest RatesInterest RatesTrade Balance
4InflationTrade BalanceRetail Sales

Thus, indicators rarely keep their level of influence over a currency, and it is common to see major shifts in the top ranking from year to year.

Since Kathy wrote her article, other economic shifts have taken place, with perhaps the greatest ones being the shift in the importance of housing stats. With the popping of the housing bubble and its dramatic contraction, new US economic indicators like existing home sales have begun to crowd out top releases from previous years.

To date, no one has updated Kathy’s research to reflect the current environment. Many of the top reports retained their current spot, but that housing data would have been pushing its way up. If we were to create a table of more current top economic reports for the US Dollar, presumably it would look like this.

1Nonfarm Payrolls
2Trade Balance
4Retail Sales
5ISM Non-Manufacturing
6Personal Spending
7Existing Home Sales
9Current Account
10Durable Goods
11TIC Data
12Industrial Production

All the above economic indicators are important gauges for the strength of the US Dollar, and though their relative importance will shift with the changing economic landscape, it is a good idea to treat all of them seriously. I would guess that Non-farm payrolls keeps its 10-year top spot because it is the most powerful gauge of the US economy.

As the US economy slowed in 2007-2010, the stability of the labor market was closely watched by all traders because of its implications for the entire economy. As a leading indicator for the consumer sector (for confidence and spending), business health (with investment in labor) and interest rates (through spending and inflation), the payroll number can be viewed as a relatively objective gauge of the general health of the economy. T

rade balance has moved back into the top five slot because when the GDP cannot be helped by consumer spending or government spending, then all that is left is the balance of trade.

The ability of these indicators to generate follow through suggests they have a lasting influence on the US dollar and are not just open to a quick adjustment to account for fundamental surprises. For instance, trade balance and ISM manufacturing reports (though they might not account for the quick moves on the daily and 20-minute charts) do have a lasting impact on the dollar.

Another interesting observation is the ISM service’s (non-manufacturing) presence within the top five. It has entered into the higher ranks due to fears of a US recession. Such concerns could keep this indicator near the top spot. Finally, the personal spending indicator unexpected rise is because it is tied in to the health of the broader economy, and it comes on the same day as the ISM factory release.

The market is highly sensitive to surprise releases from many of the more fundamentally crucial economic releases. What’s more, the cooler response to scheduled indicators over the longer term will not last. Interest in fundamentals historically goes through peaks and troughs depending on the presence of exogenous event risk. As risk in credit and other markets tempers, market participants will be more willing to take on speculative risk and respond to the ever-evolving fundamental docket.

To give you a better idea of the indicators themselves, their level of relevance, what they mean, source, release time, refer to the table below.

Economic IndicatorRelevanceWhatSourceRelease TimeRevisions
EmploymentVery HighAre jobs being created? It has great economic and political significanceBureau of Labor Statistics8:30 am EST, first Friday of each monthCan be major. Revisions often go back two months with each release
Trade in Goods & Services
Medium to highReport on U.S. exports and imports of goods and servicesCensus Bureau8:30 am EST, data released second week, refers to 2 months earlierRevisions that go back several months, change is small
Consumer Price IndexVery HighMost popular measure of price inflationBureau of Labor Statistics
8:30 am EST, released 2nd and 3rd week following covered month.None.
Retail SalesHighFirst report of the month on consumer spending, can have big surprisesCensus Bureau8:30 am EST, 2 weeks after month ends, monthlyCan be huge. Each release contains broad revisions of the two prior months. Annual benchmark changes are released in March and can go back 3 years.
Gross Domestic ProductMedium to highReport on health of economy, GDP measures how fast or slow the economy is growingBureau of Economic Analysis, Commerce Department8:30 am EST, advanced estimates each quarter, final week of Jan, Apr, Oct, 2 rounds of revisions follow, each a month apartMonthly revisions are moderate, though can on occasion be substantial
Current AccountMedium to highBroadest accounting of America’s trade and investment relationship with rest of worldBureau of Economic Analysis
8:30 am EST, released 2 half months after referenced quarterModerate
Durable Goods OrdersHighKey indicator of future manufacturer
Census Bureau8:30 am EST,3-4 weeks after end of reporting month, monthlyCan be major, and cover 2 preceding months.
TIC DataMedium to HighTell us the value of the U.S. debt and securities foreign investors are buying compared to the value of the foreign debt and securities U.S. investors are buying.US Treasury
9:00 AM (EST); monthly, in the second month following the reporting monthData are subject to revisions for 24 months following release
Industrial ProductionMediumRecords U.S industry’s output and it spare capacityFederal Reserve Board9:15 am EST, released around the 15th of month, reporting on previousModest changes made over subsequent 3 months
ISM Manufact
Very HighFirst monthly report on the economy, focus on manufacturersInstitute for Supply Management10:00 am EST, first business day after reporting monthNone
Personal Income and SpendingMedium to highRecords personal income, spending, and savingDepartment of Commerce8:30 am EST, monthlyData undergoes revisions for the new several months, changes are modest
Consumer Confidence IndexMedium (can be high at turning points)Examines how consumers feel about jobs, economy, and spendingThe Conference Board10:00 am EST, last Thursday of month being surveyedMinor Revisions
Weekly Claims (UI)HighTracks new filings for UI benefitsDepartment of Labor8:30 am EST, every Thursday, weeklyMinor changes
Productivity and CostsMediumMeasures changes in the efficiency of workers who produce goodsCensus Bureau8:30 am EST, five weeks following the end of quarter (quarterly)Revisions can be substantial.
Survey of Consumer SentimentMedium (can be high at turning points)Near-real-time assessment of consumer attitudes on business climate, personal finance, and shoppingSurvey Research Center, University of Michigan9:45 am EST, second Friday of each month, final on last FridayLow, prelim numbers mid-month are revised two weeks later.
Housing Starts & Building PermitsMediumRecords the number of new homes being built and permits for future constructionCensus Bureau8:30 am EST, released 2-3 weeks after month coveredModest Revisions
Existing Home SalesMedium to highMeasures monthly sales of previously owned single-family homesNational Association of Realtors10:00 am EST, four weeks after reporting month endsModest revisions.
New Home SalesMediumTracks the sales of new single-family homes.Census Bureau10:00 am EST, four weeks after reporting month endsFrequent revisions can cover preceding 3 months.
Weekly Mortgage Applications Survey and National Delinquency SurveyMediumTracks the number of Americans applying for a mortgage to buy or refinance a home. Mortgage Bankers Association 7:00 am EST, every Wednesday, covering the previous week.Few.
Producer Price IndexVery HighMeasures the change in prices paid by businessesBureau of Labor Statistics8:30 am EST, announced 2 weeks after reporting month.Subject to 1 revision published 4 months later.
Employment Cost IndexMedium to HighMost thorough measure of labor costsBureau of Labor Statistics
8:30 am EST, released last Thursday of Apr, Jul, Oct, JanRevisions announced annually, changes going back several years.