TradingKey - Whenever you check financial news, terms like GDP, CPI, and non-farm payroll reports are all over the headlines.

Why does the dollar immediately strengthen when U.S. GDP unexpectedly surpasses expectations? And if CPI data soars, how should traders strategize?

In April 2025, when U.S. non-farm payroll data exceeded expectations, how did the forex market react?

As a key measure of economic health, GDP reflects the total worth of all goods and services generated within a nation over a defined timeframe, including factors such as consumption, investment, government expenditure, and net exports.

Generally, an increase in the GDP growth rate signals a healthy economy, attracting investment inflows and bolstering the domestic currency.

For example, in the third quarter of 2023, U.S. GDP growth unexpectedly soared to 5.2%, significantly exceeding market expectations of 4.5%.

This surprising data hit the financial markets like a bombshell—prompting immediate adjustments to predictions regarding Federal Reserve interest rate hikes. With such robust economic activity at play, could inflation spiral out of control? Would the Federal Reserve need to increase interest rates?

As a result, the U.S. dollar index rose by 1.8% within just one week, while the EUR/USD exchange rate plummeted from 1.07 to 1.055.

This serves as a prime example of how GDP data influences market expectations and how these shifts are reflected in exchange rates.

(source:Shutterstock)

Focus on the Big Picture and “Expectation Gaps”

Before GDP data is released, tracking market expectations through professional financial platforms can help you stay informed and composed.

If a country's GDP growth surpasses expectations for two consecutive quarters, it often signals that the economy is on an upward trend, suggesting potential appreciation for its currency.

In such cases, consider buying mainstream currencies like the dollar or euro during dips.

Beware of “Buy the Rumor, Sell the News” — Don’t Catch the Last Wave

After GDP data is announced, if the actual result merely meets expectations instead of exceeding them, you might encounter a "buy the rumor, sell the news" scenario.

The market typically prices in expectations ahead of time; thus, investors who anticipated an upside surprise may sell off their previously acquired assets.

What should you do?

In this situation, it’s essential to incorporate technical analysis to establish reasonable profit-taking points and lock in gains promptly to mitigate losses from potential pullbacks.

Consider Long-Term Trends

For instance, in economies like Japan where GDP growth has declined for four consecutive quarters, this indicates sluggish economic performance and often leads to a weaker currency.

You can use these long-term trends as crucial factors in your investment decisions and consider shorting that country’s currency during periodic rallies.

Using USD/JPY as an example: when Japan's GDP remains persistently weak, strategically shorting the yen at elevated exchange rate levels could present opportunities for long-term investment gains.

CPI, or the Consumer Price Index, is a crucial indicator that measures changes in the price level of consumer goods and services, serving as a direct reflection of inflation.

Fluctuations in CPI often impact the interest rate decisions made by central banks. Let’s explore the logic behind this.

High CPI — Central Banks May Raise Interest Rates

When the year-over-year growth rate of CPI exceeds 3%, it indicates that significant inflation is affecting the market.

In such scenarios, central banks typically respond by raising interest rates.

Controlling Inflation

Increasing interest rates makes borrowing more expensive, leading businesses and consumers to reduce loans and investments.

This decrease in “hot money” circulation helps to weaken upward pressure on prices.

Attracting Foreign Investment

Higher interest rates act like a "magnet," drawing foreign investors to put their money into domestic assets (such as purchasing bonds or depositing funds with banks).

This influx increases demand for the domestic currency, which can lead to short-term appreciation.

Low CPI — Central Banks May Lower Interest Rates

Conversely, when CPI falls below 1% or shows signs of deflation (continuous price declines), central banks may choose to cut interest rates.

Fostering Economic Expansion

Reducing interest rates lessens borrowing expenses, which can incentivize businesses to grow and encourage consumers to increase their spending—ultimately boosting economic activity.

Pressure from Capital Outflows

Low interest rates can diminish the attractiveness of domestic financial assets; investors may seek higher returns in other countries with elevated rates.

This shift can increase domestic currency supply while reducing demand, ultimately leading to depreciation.

For example, during the COVID-19 pandemic in 2020, the European Central Bank maintained negative interest rates and intensified easing measures.

As a result, many investors moved their funds elsewhere, resulting in prolonged weakness in the euro against the dollar (EUR/USD), which adversely affected the competitiveness of European export companies.

Focus on Core CPI to Filter Out Short-Term Disturbances

Energy and food prices are often subject to fluctuation due to factors like weather and geopolitical events, which can obscure the true inflation trend.

Core CPI, on the other hand, excludes these volatile components, offering a clearer view of underlying inflationary pressures within the economy. If Core CPI shows a rising trend for three consecutive months, it may signal that the central bank is poised to tighten policy—even if overall CPI appears stable.

Immediate Trading After Data Release — A Prime Opportunity for Short-Term Traders

For example, following the release of U.S. CPI data, market fluctuations are often most pronounced within the first half hour.

Since inflation directly influences the Federal Reserve's interest rate decisions, investors quickly adjust their expectations based on new data, resulting in significant volatility in exchange rates and stock markets.

If you’re interested in short-term trading, this period warrants your full attention!

Beware of “Secondary Effects”

The implications of CPI extend beyond immediate volatility; they can also shift market expectations regarding central bank policies in the longer term.

For instance, a consecutive decline in CPI readings may lead the market to shift its outlook from expecting interest rate hikes to anticipating cuts.

Such shifts can trigger sustained trends lasting several days or even longer. In these scenarios, it's crucial to consult data from interest rate futures and other indicators for a comprehensive analysis of market direction rather than relying solely on a single metric.

The U.S. Non-Farm Payroll (NFP) report is widely considered one of the most impactful employment statistics globally.

It provides a comprehensive overview that includes three key indicators: new non-farm jobs added, the unemployment rate, and average hourly earnings.

These metrics directly reflect the health of the U.S. labor market and can significantly impact Federal Reserve interest rate decisions as well as trends in the foreign exchange market.

How Do These Three Core Indicators Affect the Market?

New Non-Farm Jobs Added

When job additions significantly exceed expectations (for example, if analysts anticipate an increase of 200,000 jobs but actual figures show an increase of 300,000), it indicates robust corporate expansion and vigorous economic activity. However, an overheating economy may lead to inflationary pressures, prompting the Federal Reserve to consider raising interest rates to cool things down.

Increased interest rates enhance the attractiveness of dollar-denominated assets, attracting foreign capital inflows and resulting in a stronger dollar.

Conversely, if job growth falls short of expectations, concerns over economic slowdown can arise; this may lead markets to speculate on potential interest rate cuts by the Federal Reserve—putting downward pressure on the dollar.

Unemployment Rate

The unemployment rate reflects the percentage of individuals actively seeking work but unable to find employment.

A high unemployment rate usually correlates with reduced consumer spending, which can slow economic growth.

Since consumption acts as a significant engine for U.S. economic expansion, strong consumer spending can boost market confidence in economic stability and consequently support a rising dollar.

Average Hourly Earnings

An acceleration in wage growth (for instance, increasing from an anticipated 4% to 4.5%) suggests that companies are compelled to raise wages due to intense competition for labor.

Such increased labor costs may be passed on to consumers through higher prices for goods and services, driving inflation up.

In this context, markets might perceive a greater likelihood of Federal Reserve interest rate hikes aimed at mitigating inflation—providing support for the dollar.

Conversely, if wage growth remains weak, easing inflationary pressures could lead markets to expect steady or lower interest rates—which would be detrimental to the dollar.

(source:Freepik)

One Hour Before Data Release: Strengthen Your Defensive Position and Decrease Holdings.

In this period, the market is rife with uncertainty, liquidity tends to decrease, and volatility can spike suddenly.

Rather than risking open positions, traders should consider reducing their holdings in advance and reallocating funds to safer assets (such as cash) to avoid being caught off guard by abrupt market swings.

Five Minutes After Data Release: Quickly Assess Expectations and Act Decisively

If the data exceeds expectations and is bullish for the dollar: For instance, if the March 2024 non-farm payroll figures significantly surpass forecasts, USD/JPY could surge by 30 points within just five minutes.

In this scenario, it’s advisable to go long on USD/JPY or USD/CHF to capture short-term gains.

If the data falls short of expectations and is bearish for the dollar: If the figures disappoint, consider taking short positions on dollars at elevated levels by purchasing EUR/USD or GBP/USD.

Alternatively, you might look to go long on safe-haven assets like gold, which typically appreciates when the dollar weakens.

Beware of “Correction Traps”

A key feature of non-farm payroll data is that it often faces subsequent revisions.

Due to potential errors or omissions in data collection and reporting processes, these figures may be adjusted later.

If initial reports appear strong but are followed by significant downward revisions, it could lead to a reversal in market sentiment.

While single economic indicators provide valuable insights in forex trading, they are often influenced by various factors that can distort signals.

To achieve a more accurate understanding of market trends and enhance trading decision-making, investors should integrate multiple economic indicators for cross-validation and comprehensively analyze market conditions.

"GDP + CPI" for Identifying Economic Cycles

GDP and CPI serve as critical indicators reflecting the overall health of the economy.

Their combined analysis effectively helps investors determine the current phase of the economic cycle, enabling them to develop tailored forex trading strategies.

"Employment Report + Interest Rate Decision" for Capturing Policy Inflection Points

Non-farm payroll data (new jobs added, unemployment rate) alongside central bank interest rate decisions (such as the Federal Reserve's dot plot) are critical tools for monitoring monetary policy.

For example, if non-farm job additions drop below 200,000 for three consecutive months (as observed with late 2023 data) while the unemployment rate rises slightly.

This suggests that businesses might be adopting a more cautious approach to hiring, which could indicate a potential slowdown in economic growth.

In such instances, if the Federal Reserve's dot plot shows an "increased likelihood of future rate cuts," investors can proactively position themselves—such as shorting USD/JPY (expecting dollar weakness due to anticipated Fed cuts) or going long on gold (a safe-haven asset likely to benefit from easing expectations).

Incorporating Leading Indicators like PMI

The Purchasing Managers' Index (PMI) acts as a leading indicator that captures trends earlier than GDP or CPI.

A manufacturing PMI above 50 signifies expansion among businesses (reflected in new orders and increased production).

For instance, if China's PMI returns to 52 in March 2024, it could foreshadow GDP recovery in Q2; thus, investors should keep an eye on currencies such as the renminbi or commodity currencies like the Canadian dollar, which may gain from rising demand for commodities driven by economic growth.

Conversely, a sharp decline in services PMI—from 55 to 48 (for example during pandemic lockdowns)—indicates significant pressure on consumption and service industries. Even if the current GDP remains stable, this may raise concerns about potential future economic slowdowns. Investors should remain vigilant and consider reducing exposure to riskier currencies in advance.