Chapter 3Exploiting Information about Economic Growth

Economic growth data follow inflation and interest rates closely in shaping the currency flows. Countries that are experiencing actual and expected economic growth generate more jobs in their economy. Consumer spending therefore increases. In turn, the demand for housing increases as people have more disposable income and can better afford housing. Other sectors, such as the auto sector, also experience changes in demand as consumers' propensity to spend reflects greater confidence regarding their economic conditions. When growth is very strong, it may be unstable and lead to high inflation. When growth is too slow, it leads to unemployment, recession, and potential deflation. It is a global balancing act where currencies become the blood flow of the world economy.

The transactions of a modern economy intimately involve global flows of capital as exports and imports are part and parcel of the vitality of an economy. The term economic growth is really a wide category. How is economic growth measured and tracked by the forex trader?

The rate of economic growth or development of a country is popularly measured essentially by its gross domestic product (GDP), so news about GDP becomes an essential ingredient in shaping trader sentiment about the value of a currency. A slowdown or expected slowdown in GDP translates into anticipation that interest rates will not go higher or may even decrease. This anticipation results in pressures ...

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