The Importance of Inflation in the Forex Market

Inflation, that is, the continuous increase in prices from the general level. The inflation rate, shown as a percentage, determines how quickly goods and services in the economy generally rise or fall. Inflation, which is one of the most important data for central banks, gives information about the purchasing power and economic stability of the country’s currency. So, how do these developments happen and how do inflation rates affect the forex market?

Inflation Rate and Forex Market Steps

The effect of inflation values ​​seen in the economies of many countries takes place on local currencies. However, inflation movements of large economies such as the USA, Europe and China are suitable to affect all markets. These changes not only affect parities but also show themselves in commodity prices. Investors who direct their transactions according to the changing prices with the effect of inflation; They determine parity selection, investment instrument and buy-sell decisions accordingly. These developments are not bad news for the forex trader. Investors just need to keep track of the inflation rate and its effects so they can predict things. Directing your transactions accordingly and using the bidirectional trading feature consciously can even open the door to making profits in the forex market.

Inflation vs. the central bank

Inflation rates of economies are among the areas of interest of central banks. Due to the inflation rate, central banks can make significant changes in their monetary policies. Very drastic price changes in the value of the currency, such as interest rate decisions, also affect forex trading. This is where knowing the inflation rate and following its effects comes into play. Such policy changes by central banks should be followed closely by forex market investors as they can create significant trading opportunities.

Pay Attention to the 2% Ratio

According to the world’s leading economists, the desired inflation rate in a country should be 2%. Comments are made that an inflation rate that is well above or below 2% in the economic structure will cause problems. Since inflation movements that are well above or below this rate will cause maximum fluctuations in prices, forex followers should have strategies to protect themselves from these price changes. Investors, who are aware of the opportunity to open a door of profit to their transactions with price changes, can profitably use this opportunity with a strict technical analysis process.

SEE ALSO; Forex Position Size Determination

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