Inflation and forex:why prices move FX.
Inflation and forex are linked through 1 channel: interest rates. When inflation is high, central banks keep rates high, and a currency with higher rates usually attracts money.
That is why an inflation print can move a currency more than almost any other number.
The chain
Inflation rises, the central bank keeps rates high or hikes, yields stay attractive, money flows in, the currency strengthens.
The exception
If inflation gets so high that it damages growth, the market starts to price cuts later on. Then higher inflation can weaken a currency.
Use it in real trading
The tool informs the decision, it never makes it. Here is how it plays out on real trading days.
US core CPI beats forecast. Cut odds fall, the dollar rises.
Inflation is high but growth collapses. The market prices cuts anyway, and the currency weakens.
Mistakes to avoid
- Thinking high inflation is always bad for a currency.
- Ignoring core inflation.
- Forgetting the forecast.
What makes it different
The calendar, the CPI scenarios and the rate probabilities connect every inflation print with what it means for rates.
Questions
Which inflation number matters most?
Core CPI and the central bank’s preferred measure.
Is inflation always good for a currency?
No, only when it keeps rates high without hurting growth.
How often is it released?
Monthly.