Trading News for Beginners – How Important is US GDP?

May 05, 2022 15:35

Gross Domestic Product (GDP) is another way of referring to the size and growth of an economy. 

As the US is the world’s largest economy, the health of its GDP is a number one priority for investors and trading partners. Just how big is the US economy? In 2020, for example, annual GDP was valued at 20.9 trillion USD compared to China’s 14.7 trillion USD and the Eurozone’s 13 trillion USD.  

Trading news features US GDP on a regular basis and economic releases by the US Bureau of Economic Analysis are monthly, quarterly and annual trading events. There’s a direct connection between the USD and GDP trading events that can often move the national currency depending on whether the news is good or bad.  

A growing US economy 

When the US economy grows, traders and investors take it as a good sign and the USD becomes attractive in the Forex markets because it is seen as a stable and liquid currency with good prospects. This is why the EURUSD is the most highly traded currency pair in the Forex markets and the USD is a safe-haven asset. Forex traders see both currencies as stable and easily exchanged with each other because the underlying economies are powerful.  

Stablecoins like USDT are based on USD reserves and considered to be more easily exchanged than many other crypto currencies.  

A resilient currency is not the only positive effect of a growing US economy. Yielding assets that are bought and sold in US Dollars also become interesting to investors. These can include bonds like US Treasuries and bank and corporate securities.  

Stock investments are also likely to shine with their own halo effect when investors feel more confident that GDP is growing.  

Last, but not least, the job market is likely to be robust and employers would invest in creating new positions and opening new companies.  

In short, a rising GDP carries all ships.  

A shrinking US GDP 

Dramatic events happen in the financial markets when the US enters a recession and GDP disappoints traders and investors.  

In a scenario where the US economy is shrinking, there can be domino effects on the national currency, which can weaken and undermine consumer spending power. Instead of being an attractive buy, the trading markets may switch their safe-haven spending to gold assets or the JPY.  

A shrinking GDP implies falling markets in the stock and currency sectors, but that doesn’t mean that investors stop investing or traders stop trading. Instead, their behaviour and psychology become defensive and may focus on short-term profit taking and other strategies.  

How to trade on US GDP news 

Trading on US GDP news depends on the direction the economy is taking, the scale of the change and what the conditions are like. Bear in mind that when GDP news is announced, there is usually an immediate response from the Forex markets as millions of traders take positions based on the survey results. The scenarios below are by no means exhaustive, but intended to give a snapshot of what might happen.  

Economic downturns 

In one scenario, GDP is shrinking slightly but there are temporary reasons such as geopolitical events that are causing a limited problem. Investors and traders may trim their positions on the USD and USD-denominated assets but maintain calm and confident that the problem will soon pass.  

In another possibility, GDP is shrinking rapidly and one of the economy’s key benchmarks like the job market has a long-term problem. Investors in the stock markets and currency traders would likely take more drastic measures to limit their exposure to USD-denominated assets and put their money into safe-haven assets like gold.  

Economic upturns 

If US GDP has risen slightly and economic conditions are normal, market sentiment is likely to be positive and the USD could gain more attraction because of the stability and confidence factor.  

There’s another possibility: the economy could be booming and a key economic benchmark like inflation may be running high. This would likely make for nervous market sentiment because of the risk of a sudden reversal and an increasing likelihood of a recession.  

Before trading on US GDP news, it’s wise to learn more about how fundamental analysis works by registering for Admirals Webinars, hosted by experts in the trading markets, and reading our wealth of educational resources and courses for traders and investors, including Forex 101. 

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. 

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.