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How CPI data affect currency prices

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– Review by Daniil Dubrovsky, April 12, 2021

In this article, we will look at CPI and forex trading, see what traders need to know about the consumer price index to make informed decisions. We will look at what CPI is as a concept, CPI release dates, how to interpret CPI and what to consider when trading forex with CPI data.

What is CPI and why is it important for forex traders?

The consumer price index is better known on the abbreviation CPI, is an important economic indicator released on a regularly based on major economies to give a timely picture of current growth and inflation.

Inflation, which is monitored through the CPI, looks specifically at purchasing power and rising prices for goods and services in the economy, which can be used to influence a country’s monetary policy.

The CPI is calculated by averaging price changes for each product in a predetermined basket of consumer goods, including food, energy, and services such as health care.

This is a useful indicator for currency traders because of its aforementioned impact on monetary policy and, in turn, interest rates that directly affect the strength of the currency. The full usefulness of knowledge on how to interpret CPI as a forex trader will be discussed below.

Read on how interest rates affect the forex market.

CPI release dates

CPI release dates typically occur each month, but in some countries, such as New Zealand and Australia, quarterly. Some countries also offer annual results, such as the German index. The U.S. Bureau of Labor Statistics has been reporting monthly to the CPI since 1913.

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

Country / jurisdiction

Body composition

Frequency of releases

Australia

Australian Bureau of Statistics

Quarterly

Canada

Statistics Canada

Monthly

China

National Bureau of Statistics of China

Monthly

Eurozone

European Central Bank

Twice a month

Germany

Federal Statistical Office of Germany

Monthly, annually

Italy

Istat

Monthly

India

Ministry of Statistics and Program Implementation

Monthly

Japan

Statistics of Japan

Monthly

Great Britain

Monetary Policy Committee

Monthly

USA

U.S. Bureau of Labor Statistics

Monthly

Why Forex Traders Should Follow CPI Data

Understanding CPI data is important for currency traders because it is a strong indicator 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 higher inflation will lead to higher reference interest rates set by politicians to help stifle the economy and support the inflation trend. In turn, the higher the country’s interest rate, the more likely it is to strengthen its currency. Conversely, countries with lower interest rates often mean weaker currencies.

Issuing and revising CPI figures can lead to fluctuations in the value of a currency against other currencies, meaning potentially favorable volatility that can benefit skilled traders.

In addition, CPI data are often recognized as a useful indicator of the effectiveness of economic policies of governments in response to the state of their domestic economy, a factor that currency traders can take into account when assessing the likelihood of currency movements.

CPI can also be used in conjunction with other indicators such as Producer price indexfor currency traders to get a better idea of ​​inflationary pressures.

What to consider when trading forex according to CPI

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

Like any major release, it can be helpful to avoid an open position just before. Traders may think to wait a few minutes after the release before looking for possible trades, as forex spreads can expand significantly immediately before and after the report.

Below is a graph showing monthly inflation rates in the US. Inflation is expected to be 1.6% last month compared to last year. If the CPI is published higher or lower than expected, this news event could affect the market.

The chart shows inflation in the US in 2018/19. Source: TradingEconomics.com. U.S. Bureau of Labor Statistics

One way to interpret the impact of CPI data is through monitoring US Dollar Index, an example chart for 2018/19 is given below. If the CPI deviates from expectations, it is reasonable to assume that this could be a catalyst for bringing the index to new highs or a rebound from resistance.

Because the Index is enabled with EUR / USD, USD / JPYand GBP / USDbrowsing US Dollar we can get a full interpretation of the results of the events.

CPI and Forex: How CPI Data Affects Currency Prices

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

As can be seen in the above example, as inflation rose in the first half of 2018, the US dollar index rose accordingly. But due to the fact that in the following months, inflation in the US fell below and with an unacceptable target of 2%, this pushed the increase in interest rates in the US off the agenda. As a result, the dollar struggled and weakened against a basket of other currencies.

Not every fundamental news release works through cost as expected.

Once the CPI data was published and analyzedzEd, traders need to see if the market price is moving through any areas of technical importance, or bouncing off of them. This will help traders understand the short-term strength of the movement and / or the strength of the levels of technical support or resistance, and will help them make more informed trading decisions.

Read more about CPI, inflation and forex

Make sure you bookmark it economic calendar to stay up to date with the latest CPI data published by a number of countries, and to keep abreast of all DailyFX news and analytics updates. Also book your place with us A series of weekly central bank webinars to learn about news, market reactions and macro trends.

For more information on inflation and its impact on forex trading decisions, see our article Understanding inflation for currency trading.

https://www.dailyfx.com/forex/fundamental/article/special_report/2021/04/12/the-cpi-and-forex.html

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