How Currency Prices are Impacted by CPI Data and the Forex Market

WHAT IS CPI AND WHY DOES IT MATTER TO FOREX TRADER?

The Consumer Price Index (CPI) is a vital economic gauge that holds significant relevance for forex traders worldwide. It serves as a crucial barometer of an economy's growth and inflationary tendencies, imparting timely insights into the prevailing economic conditions.

CPI primarily tracks inflation by examining the purchasing power and price fluctuations of goods and services within an economy. This insight enables policymakers to influence a nation's monetary policy effectively.

The CPI computation involves averaging the price changes of various items in a predetermined basket of consumer goods. These encompass essentials like food and energy, as well as services such as medical care.

Forex traders keenly observe CPI releases as it holds the power to impact monetary policies, and consequently, interest rates. The fluctuation in interest rates significantly influences the strength of a country's currency, making CPI an indispensable tool for forex traders to comprehend and interpret accurately.

CPI RELEASE DATE

The CPI is reported every month in most countries, but some countries, such as New Zealand and Australia, only report it every three months. Some countries also provide annual results, such as Germany’s index. The CPI has been published monthly by the US Bureau of Labor Statistics since 1913.

The table below shows some of the major economies and their CPI release details.

COUNTRY/JURISDICTION	COMPILING BODY	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 monthly
Germany	Federal Statistical Office of Germany	Monthly, yearly
Italy	Istat	Monthly
India	Ministry for Statistics and Programme Implementation	Monthly
Japan	Statistics Japan	Monthly
UK	Monetary Policy Committee	Monthly
US	US Bureau of Labor Statistics	Monthly

WHY FOREX TRADER SHOULD FOLLOW CPI DATA

Comprehending CPI data is vital for forex traders as it serves as a robust indicator of inflation, wielding substantial influence over central bank monetary policies.

The impact of CPI on the economy is profound. Escalating inflation usually leads policymakers to raise benchmark interest rates, thereby curbing economic growth and reining in inflationary tendencies. Consequently, higher interest rates in a country tend to strengthen its currency, while lower interest rates often result in a weakened currency.

The release and revision of CPI figures can trigger significant fluctuations in a currency's value against others, presenting skilled traders with potential opportunities to capitalize on favorable volatility.

Furthermore, CPI data is widely regarded as a valuable gauge of governments' economic policy efficacy in response to domestic economic conditions, a crucial factor for forex traders to consider when assessing the likelihood of currency movements.

To gain a more comprehensive perspective on inflationary pressures, forex traders can combine CPI data with other indicators, such as the Producer Price Index. This synergy enables them to gain deeper insights into economic trends and make more informed trading decisions.

WHY TO CONSIDER WHEN TRADING FOREX AGAINST CPI DATA

When incorporating CPI data into forex trading strategies, traders must take into account the market's anticipations of inflation and the potential impact on the currency should these expectations be met or missed.

Similar to any major economic release, it is prudent to avoid maintaining an open position immediately before the announcement. Traders might opt to wait for several minutes after the CPI report is released before assessing potential trades, as forex spreads could significantly widen during the period surrounding the announcement.

The following chart illustrates the monthly inflation rates for the US. For the most recent month, the projected inflation rate stands at 1.6% compared to the previous year's data. Should the CPI be revealed to be higher or lower than these expectations, this news event possesses the capacity to exert substantial influence on the forex market.

The following chart shows the US inflation levels in 2018/19, based on the data from TradingEconomics.com and the US Bureau of Labor Statistics.

One method to understand the impact of CPI data is to observe the US Dollar Index, which is shown in the chart below for 2018/19. If the CPI deviates from the expectations, it is likely that this will trigger the Index to reach new highs or to bounce back from resistance.

The Index consists of EUR/USD, USD/JPY, and GBP/USD, so by watching the US Dollar we can get a complete picture of the outcome of the event.

The following chart shows the changes in the US Dollar Index, based on the data from TradingView.com.

The example above shows that as inflation increased in the first half of 2018, the US Dollar Index also rose. However, as US inflation declined in the subsequent months and missed the target of 2%, this delayed the US interest rate hikes. As a consequence, the dollar faced difficulties and weakened against a group of other currencies.

The market price does not always reflect the fundamental news release as expected.

After the CPI data is released and examined, traders should then check if the market price is breaking or bouncing off any areas of technical significance. This will help traders to assess the short-term momentum of the move and/or the strength of technical support or resistance levels, and help them to make better trading decisions.

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