Explaining the US Economic Data – Part 1

The US 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 US 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 Australian dollars. Paying from your 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 don’t see is what happens afterwards. The thing is that the bank, to complete the transaction, has to buy the Australian dollars to pay for the home; and that means that the bank must exchange the GBP into USD, then with the resulting USD buy the equivalent Australian dollars needed for the transaction. Such an example is a simple one designed to illustrate how financial markets work, and the role and importance of a reserve currency. If there was a different currency from the US dollar involved, then the example above would have that currency in it instead. Because the financial system is what it is and the US dollar is the pillar of it, the US economic data is crucial for traders and central bankers around the world. Everyone looks at the economic data in the United States to get an idea of how the economy is performing and what the central bank (the Federal Reserve of the United States) is going to do at the next meeting.

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The Yellow Data

As you know by now, the economic data is presented in the economic calendar graded by the importance and/or the impact it is likely to have on the currency. The most important economic news items are presented in red, 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 may not be 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” data to be found on the economic calendar. Again, just because it is second or third-tier data, it is not necessarily less important. In fact, the sum of this data (yellow, orange and green), is the thing that matters for the Fed when deciding on the interest rates level. Monitoring them and being aware of their importance garners 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 consumers. 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, and in plain English, disposable income is the amount of money that is left in a family unit at the end of the month after all expenses are deducted. The bigger the amount left, the better for the family and the economy.
US data - 1
This data is released monthly and, in general, the bigger the outcome, the better it is for the currency. The example above shows the actual number beating the previous month’s release and the expectations for the current month, hence the trend is bullish and positive for the economy and the 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.
US data - 2
Like any PMI, it is interpreted based on the 50 level. Any print above the 50 mark shows a sector that is expanding, and therefore positive for that respective currency, while a print below the 50 mark spells trouble 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 whether a trend is forming or a cycle is ending. Again, above 50 means bullish for the dollar, while a print below means that a bearish outcome is expected. These two releases are only a couple of examples of how important fundamental data, 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 considers it all.

Recommended Further Reading

Other Educational Materials

– Covering all the data that matters from the United States – 2nd part.