How Business Confidence and Consumer Sentiment Affect the Market

Powerful response force that moves forex prices, as well as other markets, is business and consumer confidence data. These reports are results of extensive professionally designed surveys that are conducted on a regular basis in many countries.

When these survey results are released, they provide important information on expectations regarding the economy of a country. This information is seriously assessed by central banks in determining their next moves in controlling inflation. Growth in business or consumer confidence has inflationary potential, while a decline in business or consumer confidence portends economic slowdown. When these releases come out, they move the market, especially if the results are surprising.

Beyond having an impact upon their release, confidence indicators can also provide a leading indicator for the forex trader. If business confidence is at its highest in years, the market will interpret it as positive for the currency because greater confidence indicates expansion and growth of an economy. Where there is expectation of expansion and growth, there is the concomitant expectation of interest rates not going lower and possibly going higher. These confidence surveys are not perfect predictors of resulting currency moves. They are one of the most important ingredients in the mix of fundamental forex factors.

Some of the important confidence indicators are listed on page 42 and should be followed.

Their release times are tracked in the numerous economic calendars available, and strategies for trading these economic data releases should be learned by traders.

It is interesting to note that every major country has its version of investor and business confidence indicators. These form in effect a leading indicator about currency directions.

Investor/Business Confidence Indicators:

• Zew Economic Sentiment Indicator (www.zew.de)
• IFO Business Climate Survey (www.cesifo-group.de)
• Institute of Supply Managers (www.ism.ws/)
• Tankan Report (www.boj.or.jp/en/)
• National Australian Bank Business Survey (www.nabmarkets.com/research/flagshippublications/nationalmonthlybusinesssurvey.aspx)
• U.S. Sentiment Indicators
• Consumer Confidence (www.conference-board.org)
• University of Michigan Sentiment (http://about.reuters.com/productinfo/universitymichigan)
• ABC Consumer Comfort Index (www.washingtonpost.com/wp-srv/business/
• articles/consumerindexdata.htm)
• Fed Beige Book (released two weeks prior to Federal Open Market Committee meetings,
• eight times a year)
• ISM Nonmanufacturing (www.ism.ws/ISMReport/index.cfm)
• Empire State Manufacturing Survey (monthly report, www.ny.frb.org/research/
• regional economy/empiresurvey overview.html)
• Chicago PMI ISM Nonmanufacturing (released on the third business day of the
• month, can be found at www.ism.ws/)
• Richmond FedManufacturing Survey (www.richmondfed.org/research/regionalconditions/manufacturingconditions/index.)
• Philadelphia Business Outlook Survey(monthly,www.phil.frb.org/econ/bos/index.html)