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How does CPI data affect currency prices -by Ecork

– Reviewed by Daniel Dobrovsky, April 12, 2021

In this article, we’ll explore CPI and forex trading, and look at what traders need to know about the CPI to make informed decisions. We’ll cover what CPI is as a concept, CPI release dates, how to interpret CPI, and what to consider when trading forex against CPI data.

What is the CPI and why does it matter to forex traders?

Consumer Price Index, better known by The abbreviation for CPI is . important economic indicator released on a Normal of the major economies to give a timely glimpse into current levels of growth and inflation.

Inflation that is tracked through the CPI looks specifically at purchasing power and the rising prices of goods and services in the economyAnd the which can be used to influence a nation’s monetary policy.

The Consumer Price Index is calculated by averaging price changes for each item in a predetermined basket of consumer goods, including food and energy, as well as services such as Medicare.

It is a useful indicator for forex traders due to the aforementioned effect on monetary policy, and therefore interest rates, which have a direct impact on the strength of the currency. The full benefit of how to interpret CPI as a forex trader will be explored below.

read more How interest rates affect the forex market.

CPI release dates

CPI release dates usually occur every month, but in some countries, such as New Zealand and Australia, every three months. Some countries also provide annual results, such as the Germany Index. The US Bureau of Labor Statistics has reported the Consumer Price Index monthly since 1913.

The following table shows a selection of the major economies and information on their CPI releases.

Country/Jurisdiction

body assembly

Frequency of releases

Australia

Australian Bureau of Statistics

my quarter

Canada

Canada Statistics

monthly

China

National Bureau of Statistics of China

monthly

Euro-zone

European Central Bank

twice a month

Germany

Federal Statistical Office of Germany

Monthly, annually

Italia

Istat

monthly

India

Ministry of Statistics and Program Implementation

monthly

Japan

Japan stats

monthly

United kingdom

Monetary Policy Committee

monthly

we

US Bureau of Labor Statistics

monthly

Why Forex Traders Should Follow CPI Data

Understanding CPI data is important for forex traders because it is a powerful measure of inflation, which in turn has a significant impact on monetary policy of the central bank.

So how does the CPI affect the economy? Often times, higher inflation will translate into Higher reference interest rates They are put in place by policy makers, to help dampen the economy and subdue the inflationary trend. In turn, the higher the interest rate in a country, the more likely it is that its currency will strengthen. Conversely, countries with lower interest rates often mean weaker currencies.

The release and revision of CPI numbers can result in fluctuations in the value of a currency against other currencies, which means potentially positive fluctuations that skilled traders can take advantage of.

Also, CPI data is often recognized as a useful measure of the effectiveness of governments’ economic policy in response to the conditions of their domestic economy, a factor that forex traders can consider when assessing the likelihood of currency movements.

CPI can also be used in conjunction with other indicators, such as Producer Price Indexfor forex traders to get a clearer picture of inflationary pressures.

What to consider when trading forex against CPI data

When using CPI data to influence forex trading decisions, traders must consider market expectations of inflation and what could happen to the currency if those expectations are met, or if they are missed.

Similar to any major release, it can be helpful to avoid opening a position immediately before then. Traders may consider waiting several minutes after the release before looking for potential deals, since forex spreads It can expand significantly before and after the report.

Below is a chart showing monthly inflation rates for the United States. For the last month, expectations were set at 1.6% inflation compared to last year’s data. If the CPI is released above or below expectations, this news event will have the potential to affect the market.

Graph showing inflation levels in the US in 2018/19. Source: TradingEconomics.com. US Bureau of Labor Statistics

One way to interpret the effects of CPI data is by observing US dollar indexBelow, an example of the 2018/19 chart. If the CPI is released away from expectations, it is reasonable to believe that this could be the catalyst to push the index to new highs, or a rebound from resistance.

Since the index is composed From EUR / USDAnd the US dollar / Japanese yenAnd the British Pounds / US DollarsBy watching the US dollar we can get a full explanation of the outcome of the events.

CPI and Forex: How CPI Data Affects Currency Prices

Chart showing movement in the US dollar index. Source: TradingView.com

As can be seen in the example above, with inflation rising during the first half of 2018, the US dollar index rose accordingly. But with US inflation subsiding in the following months and with the 2% target not met, this pushed US interest rate hikes off the agenda. As a result, the dollar suffered and weakened against a basket of other currencies.

Not every fundamental news release works through price as expected.

Once CPI data is released and analyzedzTraders must then look to see if the market price is moving or bouncing off any areas of technical interest. This will help traders understand the short-term strength of the movement and/or the strength of technical support or resistance levels, and help them make more informed trading decisions.

Read more about CPI, inflation and foreign exchange

Be sure to bookmark us Economic calendar Stay up-to-date with the latest CPI data from a range of countries, and keep up with all the DailyFX news and analysis updates. Also, book your place on our website Central Bank Weekly Webinar Series Learn about news events, market reaction and macro trends.

For more information about inflation and its effect on forex decisions, take a look at our article Understanding inflation for currency trading.

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