Published On: Tue, Nov 13th, 2012

Fundamental Analysis: GDP, Inflation, Interest Rates

By Richard Cox

When traders are looking to conduct fundamental analysis on an asset (whether it be a stock, an index, a commodity or a currency), there are many pieces of economic data that can be analyzed.  Some of the most notable examples of this include Gross Domestic Product (GDP), Inflation, and Interest Rates, as these market elements can give a great deal of information with respect to the economic health of a specific region and of the global economy as a whole.

Of course, these will be critical factors when determining whether or not prices for a specific asset are likely to rise or fall in the future, so each of of these pieces data will be highly important for any spread betting trader looking to structure a trading idea and decide in the likely direction for the asset being watched.  Here we will look at the ways each of these data reports tend to influence price activity in the spread betting markets.

GDP:  Assessing the Economic Health of a Country

Gross Domestic Product Refers to the monetary value of the goods and services that are produced by a country over a specific time period.   Usually, GDP is measured on an annual basis, which means that the current GDP rate reflects the comparison between current growth and that which was seen during the previous year.  GDP is the broadest indication of a country’s economic health or weakness, as it includes all elements of both public and private consumption.

When using this information for trades, spread betters will look at the broader market trends before buying or selling an asset.  So, for example, traders looking to establish a position in the British Pound (GBP) might first look at the growth trends in GDP to determine whether the currency should be bought (long position) or sold (short position).

Inflation:  Assessing Price Changes Over Time

Another economic factor that is often watched is the rate of inflation, or the rate at which the price values for goods and services is changing over time.   Inflation is measured at both the producer level (for wholesale companies) and the consumer level (for individual households and consumers).  So, for example, if consumer inflation is 5%, an item that costs $100 today will cost $105 a year from now.

This information can be highly valuable when looking to establish trading positions as well.  For example, let’s assume we want to take a spread betting position in Ford Motor Company.   If in the US, consumer prices are moving higher while producer prices are moving lower, we could expect that the business conditions for US companies are favorable (as their costs are declining while prices for their items are increasing).  Information like this might suggest spread betters could have an opportunity to profit from long positions in Ford in the future.

Interest Rates:  Monitoring Central Bank Economic Responses

Next, we will look at interest rate levels, which gives traders an indication of how a country’s central bank is responding to the economic factors that are present in a country.  Broadly speaking, central banks tend to increase interest rates when they become concerned about the prospects for consumer inflation.  Higher interest rates are meant to limit further increases in pricing pressures.  Conversely, central banks tend to reduce interest rates when growth (GDP, for example) becomes weak.

Lower interest rates are meant to stimulate economic growth.  So, as a trading example, if a major world economy lowers interest rates, it is a sign that economic growth will rise in that area.  This could be positive for a commodity price (such as in Oil), as the increased economic activity will likely lead to greater sales of energy products.

Conclusion:  Getting the Broad Economic Picture

For fundamental analysis, it is important to get a sense of the broad economic picture, as this will be critical for determining the future price direction of a given asset.  Economic factors, such as GDP, inflation, or interest rate levels can give traders important forecasting clues when new trading positions are being considered, and rules will apply to all major spread betting market types.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.