What is common between GDP and trading?

GDP is measured in national currency, and if necessary could be recalculated at the middle exchange rate of the national currency into US dollars for comparison with other countries. This indicator can be measured for the year, quarter or month in previous accounting periods. But currency markets factor in the expected data and the actual events, while the data releases does not always correspond to expectations. If it is expected that the country will have higher GDP, and this event materializes, and the market reaction will usually be restrained.

 

Logically, if the release passes without incident, as the expectations are not met, no reaction. That is, if you trade and expect a strong jump in GDP, the currency will rise against its counterparts, actually you will likely see a reduction in it.

 

News greatly affect the movement of market prices, therefore, expected GDP growth may not be enough to raise the price of the currency. It often happens that after the publication of GDP, the currency markets cause an over-reaction of prices before the next release of GDP, giving way to volatility.

 

Another scenario is that the published GDP is significantly lower or higher than expected. This will likely create volatility as traders and investors react to this unexpected number. Much higher-than-expected GDP growth, as a rule, will lead to the appreciation of the target currency, at least for a short period of time. Continuing the trend after an initial increase of the exchange rate will largely depend on the overall state of the economy.

 

Suppose the economy is struggling to show growth, and perhaps for several months was low, the data on GDP and suddenly there is a jump in the latest release of GDP.

 

The immediate market reaction would be to buy a target currency. Traders feel that the currency may have been oversold, and considering new data that are currently undervalued. Traders will buy the target currency in hopes that it will reach higher prices, at least in the short term.

 

But this should not be surprising, if, after an initial rally, price growth will weaken and eventually return to levels specified before the publication of GDP data. One issue GDP data may not be enough to change the overall fundamental picture of the economy.

 

Releases of GDP data are usually quarterly data and annual data. These releases are made for most countries on a monthly basis. The most important indicator to be more prone to volatility, is the quarterly GDP growth. Quarterly data largely depend on the forecasts of economists. Economists and analysts publish their expectations, which are so well known, and deviations from these expectations can often send markets in a certain direction.

25 February, 2020
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