What is the Business Cycle?
Business Cycle
Forex Trading Glossary
Quick Answer: The business cycle describes recurring expansions and contractions in economic activity that drive currency performance.
What is the Business Cycle?
The business cycle tracks the recurring expansion and contraction of economic activity. Aligning trades with the cycle improves timing because pro-cyclical currencies rally when growth accelerates and defensive currencies shine during contractions.
Four Main Phases
- Expansion: Rising GDP, employment, and corporate profits.
- Peak: Growth slows as capacity tightens and inflation builds.
- Contraction: Output and hiring decline, risk appetite fades.
- Trough: Activity bottoms before the next recovery begins.
Cycle Playbook
Overweight commodity currencies such as AUD and NZD during expansions, and rotate into USD or JPY when the cycle rolls over.
Monitoring the Cycle
- Leading indicators: PMI surveys and consumer confidence turn first.
- Yield curve: Inversion often warns of recession.
- Corporate earnings: Company guidance reveals demand trends.
- Policy tone: Central-bank rhetoric shifts with the phase.
Related Terms
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