Inflation rates of countries can influence the markets to a significant extent, which is why Forex traders should take into account inflation rates of countries when trading currencies, since rates of inflation can affect the values of currencies.
There are many different fundamental indicators that currency traders should keep track of and inflation is one of them. A country’s inflation rate is the rate at which its good and services increase over a certain period of time. Rates of inflation of countries can greatly affect the prices of their currencies.
High rates of inflation are generally seen to be undesirable and they tend to cause currencies to fall in value. A high rate of inflation is seen to be bad for not only a country and its economy, but also for its currency.
Low rates of inflation are thought to be more desirable than high ones, though rates of inflation that maintain themselves fairly well and only change minimally are the most desirable. Lower inflation can be good, but very low inflation can signal a lack of aggregate demand in an economy for example, which is not good.
Unstable and volatile inflation rates can cause the currencies of countries to change similarly in their prices, so you should be aware of this. This can cause Forex traders to lose out, but remember that you can also make lots of profits with unstable and volatile markets – more risk means more reward.
It really depends on what currencies you are looking at, when you are studying inflation rates. Different countries will have different inflationary pressures. The governments of different countries typically set inflation rate targets and different countries have different targets to suit their own individual economies. You shouldn’t just look at how high or how low a country’s inflation rate is; you need to look more closely at how an inflation rate has moved over a certain period of time and where the rate of inflation of a country is sitting in relation to the government of the country’s set target rate of inflation.
At the end of the day, inflation is necessary for an economy’s health and well-being. When an economy grows, its prices should ideally grow with it. Inflation is not bad in general and it tends to move in a variety of ways, for example countries can experience cyclical inflation as part of their business cycles.
Remember that inflation is only one macroeconomic indicator of quite a few. Other main fundamental indicators include: interest rates, gross domestic product (GDP), trade balances and employment rates. You shouldn’t base any of your investment decisions off inflation rates solely, since it is only one indicator, unless of course you are trading a short-term news releases that is related to inflation. Instead, you should simply take into account rates of inflation and understand that they can definitely affect the prices of currency pairs in the Forex market.
In conclusion, the inflation rates of countries can influence the prices of currency pairs in the Forex market. However, inflation is one of many fundamental indicators and Forex traders shouldn’t really base any of their investment decisions solely on changes in the rates of inflation of different economies.