How to deal with the Consumer Price Index on the Forex

Besides from interpreting charts and applying formulas to predict its future movements, fundamental analysis can also be used when coming up with a trading strategy. Using this method, you will have to turn your attention away from charts and towards data on market developments.

The most often used data are called economic indicators which includes the consumer price index, or CPI, a commonly cited measure of an economy. The CPI is simply a tool used to determine the level of inflation, or the rate of how much prices of consumer goods are increasing.

Knowing the rate of inflation is valuable information to know because it can give you a general idea of how the economy behind a currency is doing. Healthy growing economies are often marked with moderate inflation levels, meaning that if the CPI turns out to be to as expected, it is likely that its effect on its currency will be minimal. Should the CPI turn out to be lower or higher, however, then you can start analyzing more data to see whether it will bring the currency down.

The reason for this is that an expanding economy means that its consumers hold jobs with wages that are enough to fund their lifestyle. As people get access to more money, prices will naturally increase since more people are willing to spend, increasing demand for various products and services.

The data on the consumer price index may come from various sources. Independent research organizations such as Markit Economics provide monthly updates to their inflation gauge, but it can also come from the official statistics department of governments. No matter the source, when the CP will be released is often announced ahead of time to give banks, investors, and traders like you time to incorporate it into your Forex strategy.