Traders around the world stand up and pay attention when economic releases are made that relate to inflation rates. These releases are often referred to as the Consumer Price Index or CPI, and it is a firmly scheduled event on.
Traders around the world stand up and pay attention when economic releases are made that relate to inflation rates. These releases are often referred to as the Consumer Price Index or CPI, and it is a firmly scheduled event on every economic calendar in all of the most important world economies, including the United Kingdom, Eurozone, US, Australia, China and Japan.
Trading in CFDs requires basic knowledge of trading fundamentals and an understanding of how factors like the CPI can affect the market. For those who are just starting out, it is best to seek CFD advice from the professionals in the industry in order to best capitalize on opportunities. Trading is never without risk, but you can keep that risk to a minimum by making knowledgeable decisions based on all the technical and fundamental data available.
The CPI report is incredibly useful
Central banks around the world use the CPI as the basis on which to establish any policies related to monetary matters, and inflation is a vital point of focus. Inflation that is moving upwards indicates that pressures in the economy are inflationary; the central banks will be expected to increase the rates in order to stave off the effects of inflation.
From a market point of view, currency will move to the upside in anticipation of the hike. The mindset is that everyone wants a piece of a currency that is paying higher interest rates. On the flip side, if the CPI is lower than expected and below bank targets, the market makes moves to accommodate the impending rate cut, which has a negative impact on the currency. The CPI is released on a monthly basis in most countries, but each country varies slightly in how it is calculated.
Market movement through CPI release
A CPI that falls below the expected levels can have a negative impact on the economy and the currency, and selling the currency becomes the best option. Most central banks are mandated to keep inflation at 2 to 3%; inflation rates that are higher than the band have a negative impact and essentially render the currency at a lesser value. Inflation rates that are lower than the mandated percentage are equally negative and revert to becoming a state of deflation.
Many traders try to predict what the central banks will do at the next inflation meeting in order to forward-plan their trading strategies.
CFD and forex trading and CPI reports
Although it is important to stay abreast of news that could have an effect on the market and trading, it has become increasingly more difficult to do so with complete accuracy. These days, algorithms can influence the market considerably. Waiting for the news to break and trading according to the actual figures rather than the expectations is one of the wisest trading tips that you can incorporate into your strategy. If you find yourself in a position where the actual figure is greater than the expected one, you can rest assured that the central banks will come out at the next meeting and increase the rates.
Checking the economic calendar for the scheduled interest rate decisions is vital when implementing expiration dates. If you are hoping to make a profit, your expiration date should extend past that of your call option. Inflation is a vital factor when it comes to trading and should be considered with the seriousness it warrants.