Explaining the U.S. Economic Data – Part 1
The U.S. dollar is the most important currency in the world right now for the simple reason that it is the world’s reserve currency. The financial system as we know it is built on the U.S. dollar. To give you an example, consider that you’re from the United Kingdom and want to buy a beach house in Australia. To do that, you need to pay the asking price, which is in the Australian dollar. Paying from the bank account is one thing, the way the money flows is another. While you pay from your GBP account and the bank approves the transaction, what you’re not seeing is what is happening afterward. The thing is that the bank, to complete the transaction, should buy the Australian dollars to pay for the home. Having said that, it means that the bank MUST exchange the GBP in USD, then with the resulting USD will buy the equivalent Australian dollars needed for the transaction. Such an example is a simple one designed to illustrate how financial markets work and what is the role and importance of a reserve currency. If there was a different currency than the U.S. dollar, then the example above would have that currency in it. Because the financial system is what it is and the U.S. dollar is the pillar of it, the U.S. economic data is crucial for traders and central bankers around the world. Everyone is looking at the economic data in the United States to have an idea about how the economy is doing and what the central bank (the Federal Reserve of the United States) is going to do at the next meeting.
The Yellow Data
As you know by now, the economic data is presented in the economic calendar based on the importance and/or the impact is supposed to have on the currency. With the red color, the most important economic news are presented, while orange and yellow stand for economic data that is not that important for a currency/economy. This is a tricky thing, though. While it is not important for a currency at the moment of the release, the data is part of the package the central bank, the Fed, in this case, is going to look for before deciding to hike or cut the interest rates. This article is dedicated to the “yellow-color data” to be found on the economic calendar. Again, only because it is a second or third tier data, it is not supposed to be less important. In fact, the sum of this data, yellow, orange, or green, is the thing that matters for the Fed when deciding on the interest rates level. Monitoring them and being aware of their importance represents a valuable information for the retail Forex trader. Having said that, please consider that the following data presented in this article is only a small part of the overall “yellow” data that is to be considered every month. For more information, please consult the economic calendar.
Personal Income M/M
This piece of economic data shows the change in the total value of income received from all sources by the consumer. As it can be seen in the image below, the income is correlated with spending in the sense that the more disposable income consumers have, the more likely they are to increase spending. As a side note, or in plain English, disposable income is the amount of money that is left in a family at the end of the month after all expenses are deducted. The bigger the amount left, the better for the family and the economy.
This data is released monthly and, in general, the bigger the outcome, the better for the currency. The example above shows the actual number beating the previous month release and the expectations for the current month, hence, the trend is bullish and positive for the economy and currency overall.
Final Manufacturing PMI
The Final Manufacturing PMI is a survey based on purchasing managers’ answers related to the industry they are in. The bigger the number, the better for the economy, and the better for the currency as well.
Like any PMI, it is interpreted based on the 50 level. Any print above the 50 mark shows a sector that is expanding, therefore positive for that respective currency, while a print below the 50 mark spells troubles for the economy and the currency as well. This data is released monthly and there is the possibility for traders to look at the previous releases to see if a trend is forming or a cycle is ending. Again, above 50 means bullish for the dollar, while a print below means a bearish outcome is expected. These two releases are only a couple of examples of how important fundamental data is and why it matters for the overall economy. There is plenty of “yellow” or third-tier data to be considered, and the Federal Reserve of the United States is considering it all.
- “The cyclical component of US economic activity.” Clark, Peter K. The Quarterly Journal of Economics 102.4 (1987): 797-814.