The CPI and Forex

The Consumer Price Index, better known by the acronym CPI, is an important economic indicator released on a regular basis by major economies to give a timely glimpse into current growth and inflation levels.

Inflation tracked through CPI looks specifically at purchasing power and the rise of prices of goods and services in an economy, which can be used to influence a nations monetary policy.

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

It is a useful indicator for forex traders due to its aforementioned effect on monetary policy and, in turn, interest rates, which have a direct impact on currency strength.

Understanding CPI data is important to forex traders because it is a strong measure of inflation, which in turn has a significant influence on central bank monetary policy.

The release and revision of CPI figures can produce swings in a currencys value against other currencies, meaning potentially favorable volatility from which skilled traders can benefit.

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

When using CPI data to influence forex trading decisions, traders should consider the market expectations for inflation and what is likely to happen to the currency if these expectations are met, or if they are missed.

Similar to any major release, it may be beneficial to avoid having an open position immediately before. Traders might consider waiting for several minutes after the release before looking for possible trades, since forex spreads could widen significantly right before and after the report.