Forex inflation indicators are used very commonly when traders analyze the Forex market. The inflation affects the interest rates, which in turn can affect the currency markets.
In order to fight inflation, interest rates are raised, and thus the country's currency is strengthened in relation to other currencies. In this way, in the short term, if inflation rises, the currency also rises in value.
On the other hand, if interest rates go higher, then investors withdraw from their investment in the country, and the currency weakens. Thus, in the long run. If inflation rises, the currency will eventually drop in value.
As a counter measure of rising inflation indicators, interest rates rise usually after meeting of BOE (Bank of England), FED (US Federal Reserve), ECB (European Central Bank), BOJ (Bank of Japan) and other central banks.
In order to measure inflation traders use different economic indicators.
Economic Indicators that Influence Inflation Indicators
Gross Domestic Product (GDP) – This measures the total market value of all goods and services that companies make within the country. This is an indicator of the growth pace of a country, and can tell the trader much about the prospect of inflation indicators.
Producer Price Index (PPI) - This measures price changes in manufacturing. It measures the changes in selling prices for the various manufacturers. The prices of manufacturing are at a close link with inflation indicators, and thus can help predict the online Forex trading direction.
Consumer Price Index (CPI) - This measures the average price that consumer pay for a fixed basket of goods and services. When the inflation indicators point to a rising inflation level, goods' prices also rise, and this can be viewed through the CPI.
These measures have been used throughout forex history to evaluate the market and make hard decisions about investments. They should also be used by you when you make fundamental analysis.
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