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FOREX FUNDAMENTAL ANALYSIS:INFLATION & CURRENCY TRADING

When I first started forex fundamental analysis, I got confused several times to understand the role of inflation in currency value.I thought higher inflation would decrease the currency value because it would decrease the purchase power of consumers,but I was fifty percent correct because depending on the economic situation both increase and decrease of inflation rate can be either positive or negative for currency value. This post will explain the role of inflation in currency value hence forex trading. 

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According to investopedia.com Inflation Rate is "The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling." So, generally when inflation goes up the purchase power of consumer goes down. We can consider it as a measure of how much we can buy with a Dollar; e.g. if we can buy a tooth paste for $3, we will be able to buy it for $3.06 after 2% inflation.So, here we can see the value of the dollar goes down.

In forex market, higher inflation is generally considered as a bullish sign for a currency because it encourages the economic activities and interest rate expectation. But higher inflation should be followed by sound economic performance. Traders must remember that the authority to monetary policy decides the inflation rate in the economy, and it also tracks the inflation rate to design the monetary policy. Inflation and money supply can be used synonymously.

Source: the-tribulation-network.co

When an economy has poor performance, increase in inflation can boost the economic performance. This is because higher inflation increases production and other economic activities. In contrary, if higher inflation is followed by poor economic performance, it is considered as recession. Depending on the economic situation both increase and decrease in the inflation can be either positive or negative for a currency.

We know that the authority to monetary policy takes generally three decisions interest rate decision, security purchase decision and bank reserve requirement decision to control the inflation or money supply in the economy. The main basements of these decisions by the authority to monetary policy are inflation or money supply and the economic performance.

Forex traders should track the current inflation situation in the economy to predict the monetary policy decisions by the authority to monetary policy. And in other side, they should also analyze the effects of monetary policy decisions on the inflation rate.

Many economic indicators can be considered to analyze the inflation situation of the economy, major indicators are CPI, PPI, Retail Sales, Durable Goods Orders, NFPs etc. And traders should also focus on the monetary policy decisions and their effect on the economy to predict the inflation rate.

Dear traders, you can share your suggestion in the comment section below.