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How does consumer confidence affects the economy and forex trading?

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We often see various consumer confidence reports released, such as the The U.S. Consumer Confidence Index (CCI). How does this relate to the economy or forex trading? Let us find out more.

Firstly, what is a consumer confidence index or report? To put it simply, it is usually a survey done on consumers on how they feel about the current and ongoing state of the economy. The more confident the people surveyed felt about the economy, the better the index.

Consumers are the building blocks of an economy. They buy good and services thus leading to business activities and international trade on a larger scale. When consumers are confident in the economy, they tend to spend more and this creates a flow of economic optimism and advantages.

Let us refer to the diagram below.


As you can see from the flow diagram above, the increase in consumer confidence leads to spending. This is followed by an increase of profit for the business. Once the businesses increase their profits, expansion inevitably comes along, bringing with it an increase in employment and a potential gain in equities value for listed companies.

In an optimal scenario, this will lead to consumers gaining more confidence as more are employed and equities are rallying thus starting the cycle again. Should consumer confidence decrease, the opposite can be expected.

With regards to forex, the consumer confidence index may serve as an indication for upcoming sentiments. If the consumer confidence is improving monthly, this may suggest increasing positivity. A good economic condition for a country will usually lead to an increased demand for it’s currency thus pushing up the value. Should the consumer confidence show a bearish trend, this may be an early warning for upcoming apprehension and aversion.

As of the nature of the economy and forex trading, the consumer confidence index report should be considered among various other economic reports before an assessment of the economy is concluded.

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