The consumer confidence index is often mentioned as one of the key factors that influence the forex market and consumer confidence reports are studied closely by traders who are trying to determine current and emerging trends.
Consumer confidence reports explained
Various reports such as the US Consumer Confidence Index (CCI) are designed to measure the level of optimism for the state of the economy, made evident by consumer’s savings and spending activities. The resulting figures provide the basis for measuring consumer confidence, which heavily influences the exchange rate and forex market. In the US, consumer confidence is measured monthly by an independent economic research organisation which surveys 5000 households. The results of this research are then considered indicative of consumption component level of the GDP. This practice is adopted around the world and consumer confidence reports simply sum up the way consumers feel about the state of the economy at a given time.
Increased confidence boosts optimism
The more confident consumers are about the economy, the better the consumer confidence report. The better the report, the more optimistic people are about buying goods and services. If consumers are spending more on goods and services, this increases business activities and trades on a larger scale and has a knock on effect of boosting a country’s currency. Consumers who are confident in an economy will spend more and increase economic optimism, thus boosting the value of their currency. Essentially, an increase in consumer confidence leads to increased spending, which is then followed by an increase in profit for businesses. With these added profits, businesses can expand and increase employment and for those that are listed there is the potential for gain in equities value. Of course, should there be a decrease in consumer confidence the reverse effect will be experienced and the influence on the other markets will be noted as a decline.
Consumer confidence indicates trends
For forex market traders, the consumer confidence index will serve as an indicator of trends and upcoming increases or decreases in currency values. If continued improvements are noted in a consumer confidence report, it is likely that a country’s currency will start strengthening, or if there is a decline it may be a good indication that the currency will start to weaken. Good economic conditions usually lead to an increased demand for currency and the value then rises. By studying consumer confidence reports it’s often easy to spot a forthcoming trend or pattern that will affect traders, who can move swiftly to open or close a trade. Consumer confidence reports are a vital component of successful trading and the consumer confidence index should always be considered when trading on the forex market.