Inflation and forex

for some reasons, many economists predict a big inflation to come in q4. some speak about +15% yearly.

how would it affect forex trading?
that would at least greatly reduce your rewards and increase your risks.

I’d take the stance that any and all current news is priced into the market. As new news enters, the market will re-balance. This is the strength of price action analysis.

Hey krak…
Ok. I’ll bite.
How would it affect forex trading?
Well, I surely wouldn’t agree with you about reducing any risks and rewards. That’s all up to the individual trader. We have every bit of control over the factors that have an affect on our trading.

  • Stop loss
  • Take profit
  • Position sizing

Now. If you want to talk economics. Sure. Let’s go. We need to start out by asking the right questions though. Here’s some examples of where you might be coming from.

  • What effect does inflation have on a particular economy, which invariably, might have on it’s currency?
  • In the Forex market, we are dealing with comparisons. Therefore we will be comparing one currency to another. And so, if all other things being equal, and you look at the inflation factor only, what would be more in demand? The one with higher inflation or lower inflation?
  • Maybe we need to back it all up even more. What are all of the factors that make a currency move to begin with?
  • Does the factor of inflation even move a currency?
  • If inflation was the biggest thing going on with a particular currency (economy), and all eyes were focused on that, then what?
    High inflation =
  • Bad for the economics of a country. Higher prices hurt the consumer. Plus it’s the worst nightmare for the central bank.
  • Good for investment purposes. Money gets a better return. Especially when you are comparing it (as we do in the Forex market) to another currency. Hence, the carry trade.
  • Bad in the context of trade. Our goods will be more expensive and less competitive.

We can talk about this all day long. But if you look around at the literature that deals with what inflation does to a particular currency, you will find that it usually bodes well for it, therefore the currency will be more in demand (go higher).

As the world, now, is in a deflationary period, whichever country (currency) would experience higher inflation would experience much more demand for that (move higher).

I will stop now.
Buddy…
You gave us such a broad, unspecific topic here.
Come on back with something more specific. I hope I gave you some things to think about.

Mike

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my main take was, in case of inflation, the purchasing power of your gains (if there is any) are much lower. thus increasing your risks, maybe to a point it’s not worth trading anymore.

in example : if you aim for a yearly +25% roi, but with an inflation of 15%… your real gains (if there is any) would be about 10%. Would you still be willing to work and take risks for only a possible 10%? Would inflation offset the r/r ratio to a point it’s not worth trading forex anymore?

But if you look around at the literature that deals with what inflation does to a particular currency, you will find that it usually bodes well for it, therefore the currency will be more in demand (go higher).

how come? I’d bet the contrary.

You gave us such a broad, unspecific topic here.

yes

Come on back with something more specific.

no. broad is ok.

I think that for a well-prepared trader any events on the market can be a reason and an opportunity to earn, so even if this happens we will just adapt to new information and new conditions, and look for new ways to analyze the changed market.

Frankly speaking, it’s difficult for me to make any long-term forecasts now, something incredible is happening in the world.
That’s why now I look more closely at short-term deals, so that I don’t risk my capital and be able to earn a little, but every day…

Understanding Inflation & Forex . Most people, even without a background in economics or finance know that inflation means that the value of a currency is going down. If one currency has higher inflation than another, it’s reasonable to think that its value will decrease when compared to the other.

Yes, if a currency becomes weak in comparison to another currency then you will require more of that currency to make a trade.

From what I’ve read in each of the Central Banks meeting minutes most if not all are closely looking at employment most of all over and other macroeconomic indicator. So my guess is other economic indicators will be less impacting for now. Once you start reading or hearing the Central Banks are concerned about inflation then that would impact the market more. We have to listen and read the monetary policy for each Central Bank. They always tell us what they are looking at.

Inflation can affect the existence of Forex traders that rely extremely on the volatility of the market.

Every trader has a mind set of the market being dynamic. So if any news/event hits up the price of currency pairs, we need to mould our situation in that way and trade accordingly. I would never miss the opportunity since this is when you have to adapt to new analysis and make your strategis work.

Inflation can affect the prices of currencies and hence trading. But it’s effect on the trading is difficult to measure because it is always accompanied by political and other economic conditions.

Can you please share links to the news sources you have found predicting +15% in inflation by Q4? The current environment is rather deflationary (most of the Western world in partial lockdowns, lack of additional fiscal stimulus in the USA for now).

I’m going to short USD cuz global reflation implies more risk-taking and dollar rich investors will be inclined to participate to this trend increasing USD supply.