why should a trader worry about inflation

Inflation to a trader

The persistent increase in prices in an economy leads to loss of value in the domestic currency(inflation) making it expensive to buy other foreign currencies.  When currency‘s value is below its normal value, it’s a loss to traders holding that currency because its current value becomes less than the value at which you bought it.

You have to be alert. Sell as soon as such news is released. Otherwise you will stand losses or wait to sell until that currency appreciates again. Traders always sell currencies when they suspect a future fall in their value and buying appreciating currencies.

Adjusting the interest rates, the central banks can control the amount of supply of currency in circulation and inflation. Inflation can be measured by comparing the Consumer Price index(CPI) and the Producer Price index(PPI) of the current period and the previous period.

When inflation is above the expectations, the currency is likely to strengthen. How? The central bank is likely to intervene by increasing the interest rate to curb down inflation which leads to strengthening of the currency.

While lower inflation than expected weakens the currency due to the central bank cutting down interest rates to encourage borrowing for capital expenditure. This weakens the currency in along run due to increased demand over supply as a result of excessive money in circulation which makes spending very cheap.

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