Strong economies generally have strong currencies, when an economy is performing well, it means that corporations are making profits, most of the workforce is employed and, in most cases, interest rates are going up. The stronger the economy is, the higher the demand for workers becomes. As demand for workers goes up, wages for those workers also goes up. The more money workers take home in their paychecks, the more money they have to spend at retail stores, on cars and on houses. As demand for goods and services increases, the price for those goods and services also increases and this all leads to inflation. Central banks watch the following fundamental economic indicators to gauge the strength of an economy,
Gross Domestic Product GDP
Durable goods orders
Gross domestic product(GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's overall standard of living. As GDP reports are often subject to substantial quarter-to-quarter volatility and revisions, it is preferable to follow the indicator on a year-to-year basis. It can be valuable to follow the trend rate of growth in each of the major categories of GDP to determine the strengths and weaknesses in the economy and therefore the potential currency movements.
Retail Sales are a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending. Retails Sales are a major indicator of consumer spending because they account for nearly one-half of total consumer spending and approximately one-third of aggregate economic activity.
Durable Goods Orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of such orders. Durable Goods Orders are a major indicator of manufacturing sector trends because most industrial production is done to order. Often, the indicator is followed but excludes Defense and Transportation orders because these are generally much more volatile than the rest of the orders and can obscure the more important underlying trend.
Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the net number of new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity. Payroll employment is one of the primary monthly indicators of aggregate economic activity because it encompasses every major sector of the economy. It is also useful to examine trends in job creation in several industry categories because the aggregate data can mask significant deviations in underlying industry trends.