Inflation can impact the existence of forex traders that rely profoundly on the volatility of the market. When we say “volatility” we are merely referring to the rising and falling of different currency values. The more the volatility rises, the more beneficial it is to the forex trader. Therefore buy and sell opportunities occur more frequently.
The consumer price index (CPI) and inflation rates are significant economic indicators that directly affect the forex markets. The consumer price index is the sole determinant of an economy’s price increase levels. Taking a basket of household goods and comparing their current value with their previous value, is a way to measure CPI. If the cost of the goods shows an increase, it gives the basis of the rate of inflation of an economy. Forex traders will see the rise in inflation as an indication that there is a surplus of money in the economy. The interest rate decision makers or the central bank will try to decrease this surplus. The best way to do this, in this case, is to increase interest rates which reduce borrowing – thereby developing demand for the surplus funds to be put away into the bank account and grow favorable interest.
Inflation that results from rising CPI data pressures federal reserves and Central banks to increase the interest rate. Therefore the value of the currency will increase because investors and speculators will be lured by the higher returns. The relationship between unemployment and inflation is directly inverse. When one goes down the other will rise. This is because a decrease in inflation makes it look like companies are earning less and are likely not to employ. Inflation and unemployment are the two primary indicators used by currency speculators to anticipate the changes in the currency pairs’ value. This is because they are utilized by forex traders to show future interest rates
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