Forex Market and the Employment Cost Index

The fundamental analysis of the Forex market based upon economic indicators is a big part of developing Forex market systems. A lot of online Forex trading system platforms offer data on economic indicators through their online Forex journals that are often offered free of charge. One of the important economic indicators is the Employment Cost Index - ECI - which is a major indicator that shapes and defines Forex market systems.


What exactly does the ECI scale?


The Employment Cost Index basically scales the cost of doing business. It scales monthly changes in such crucial variables as employee's wages, employment benefits and job bonuses. The ECI is so relevant that it even helps define monetary decisions and policies of the Federal Reserve.


Integration into inflation


When you compare the inflation rate to changes in monthly employee wages it is essential in accessing whether or not wages are keeping up with current price levels. E.g. when the current inflation rate is 3% per year and employee wages are increasing at a rate of 2% per year then even though wages are increasing overall they are actually decreasing when compared to actual living expenses. That could have a negative affect on the economy (e.g. less consumer spending) and in the long run have an affect on a country's currency exchange rate. On the other hand when wages are increasing at a rate of 3% per year along with healthy increases in employment benefits and job related bonuses (overall compensation package) and the inflation is only at 2% per year then the overall economy will profit as will the nation's currency rate.


A lagging but even so important indicator


Although the ECI is a lagging indicator (follows after economic change) it is still an important factor to base market systems upon. The ECI - whether up or down - basically shows a particular economic environment and can be helpful for the trader to solidify an overall trading system. E.g. the economy is showing signs of weakness for the past months but there are overall conflicting reports. The ECI report comes out and shows the economic findings of a weakening economy (e.g. lower employee wages) that in turn can have a negative affect on a country's currency exchange rate. With this information the trader can make the necessary strategic decisions if investing in the Forex market.