The Impact of Inflation in the Forex Market
In the global economy there is inflation, which is the general price increase on goods and services related to currency for a specified time. As soon as prices rise, every dollar able to buy less of the different goods and services which in other words to say, inflation makes the currency purchasing power decreases.
Inflation
Inflation affects everyone at every level of society and of course affects all consumers in an economy, which is why part of one of the most important economic indicators for central banks and market participants Forex.
Accepted by many economists is that inflation can be a positive thing as long as this is moderate, the central banks do their best to control this inflation rate within certain limits, so that in this way can the best use out the positive side of inflation and reduce the negative of it.
One of the major decisions that are used to counter the inflationary pressure is to increase interest rates, to increase them, commercial banks will increase interest when lending to different customers.
What investors want is to find a high rate of return in combination with a low risk, act the same way Forex market participants. When the central banks decide to increase the interest rate, you can be sure that demand for its currency to increase.
For example, assume that the rate of currency X is greater than the interest rate and currency will be expected that the exchange rate of currencies X / Y increase with increasing demand for the currency X with respect to demand for currency Y.
Another common measure to control inflation is the increase in reserve requirements on banks. At the time that a central bank decision is made, decreasing the amount of money the bank can leave surface, causing a reduction and limitation of the monetary resources of the economic system.
This process makes the price rise is slow, since there is less money in circulation in order to acquire the same amount of goods, which causes demand to decrease. This in turn generates the value of one currency against foreign currencies increase, mostly for speculation.
In the Forex market is an opportunity to purchase the one currency whose availability will decrease, and often the increase in reserve requirements accompanying increases in other currencies.
One of the actions by central banks that have high impact on the Forex market is when they perform operations on the market.
These transactions consist of buying and selling its own currency, this is achieved through inter-bank agreements which provides a right of repurchase by the central bank to achieve to reduce or increase temporarily the monetary resources of the system.
For example, imagine that a central bank increases interest rates as a way to support this strategy, will also make a massive purchase of the currency itself more effectively to achieve a reduction of funds.
One of the lesser used options to counter inflation is the appreciation of the currency and is less used because it can be implemented only for systems of fixed currency when the exchange rate is controlled by the authorities.
This option causes the currency appreciated to have a (strong) reduce production costs and raw materials over time ends with a drop in prices to consumers.
Now you already know some of the measures that are implemented at the time of trying to control inflation, and how are you can affect the Forex market, which is why you should be aware of the news since usually these types of decisions are announced publicly.
