Inflation and the Value of Money

The higher the volatility, the better for the Forex trader, for this simple reason that opportunities to buy and sell appear more often.

Few traders think, though, that the Forex dashboard is the perfect illustrator of the value of money. Everyone focuses on making pips day in day out, but what makes the market’s volatility?

What is the reason why currencies move and what phenomenon is responsible for influencing the value of money?

Forex traders are at the forefront of market speculation

Inflation in Forex Trading

If there is one phenomenon to understand when trading currencies, that’s inflation. As the gauge measure of the value of money, inflation is on ever central bank’s mandate.

Modern central banking targets inflation below or close to two percent, as studies suggest moderate inflation is good for economic growth. Therefore, central banks adjust the monetary policy (e.g., interest rates) according to the changes in inflation.

Or, we know that interest rates drive the currency market. But if inflation sits at the core of central banks’ decision on interest rates, it means that that is where traders’ focus should be.

Inflation shows the change in the prices of goods and services over a period, typically a year. In economic terms, the release is called CPI or Consumer Price Index.

It comes out monthly and for every currency part of the Forex dashboard. In the economic calendar, it is marked with the red color, meaning it is a valuable economic data that has the potential to bring volatility.

Oil and Inflation

The price of oil has a major inflationary component. Typically, when the price of oil rises, inflation rises too.

For this reason, central banks always consider the oil market before deciding on the monetary policy for the period ahead. Moreover, some banks, like the Federal Reserve of the United States (Fed), consider only the inflation data excluding the energy and transportation prices.

Or, it disregards the price of oil and its effects on the overall inflation. The release, called Core CPI, is the healthiest inflation gauge and measurement tool.

Conclusion

The value of fiat money (paper money) in today’s societies depends very much on how central banks contain inflation. In some cases, there’s not much to be done. Think of Venezuela, Argentina, and recently, Turkey.

The Turkish economy struggles with a high inflation rate

Their currencies simply melted as people don’t trust the ability of the central banks to fight inflation anymore. Despite interest rates rising to forty percent in Argentina, for example, the peso still falls.

Money and its valuation is a central banking concern. But if there’s one category of people knowing in advance what inflation brings, those are the Forex traders.

By watching and interpreting inflation data every month and being able to profit from the market swings, Forex traders are at the forefront of market speculation. When speculating on the value of money, you speculate on inflation.

This article was written by AMarkets

Editorial Board
Rate author
Add a comment