GDP is such a mainstream measurement that many important decisions that affect the lives of everyday people are based on. Ithas an effect on a countrys job opportunities, investment status, andcurrency exchange rate.
When it comes to international money dealings, currency exchange rates play a momentous role in the investor choices and timing of transactions. Though the relationship is not direct, it is quite strong.
GDPhas three main effects on currency exchange rates.
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Firstly, when the GDP of a country rises, the currency value of that country also rises. It also works the other way around. A weakening currency is also a result of a weakening economy. Due to this, a country has a fairly large incentive to maintain a positive growth trajectory.
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Secondly, many international corporations and investors consider GDP when making investment decisions. The majority of investors put their money into countries with strong GDP growth. Since investment generally strengthens a countrys currency, GDP indirectly affects it by influencing investment decisions.
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Thirdly, most nationalcentral banks, including the US Federal Reserve, also consider GDP growth rates when deciding whether or not they should change interest rates.
What Forex Traders Must Understand？
If you trade forex based onfundamental analysis, you need to understand how the indicators tend to influence the market. Once you master this mechanism to perfection, you can be able to enter the market in a timely manner, preparing the most effective strategies for capitalizing on the published data.
Markets like the U.S., Britain, Japan, and the European Union are most likely to affect Forex currencies once GDP data have been released. China and emerging countries (for example, India and Brazil) are constantly monitored, as they are still in the early stages of economic development.
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