Inflation rates are like undercurrents and mouse currents in the Forex market. They cannot be seen, but they are certainly present. When annual inflation is normal (usually about two percent growth per year), these undercurrents create financial patterns that fluctuate in a relatively predictable manner. As soon as the inflation figures change, a lot changes in the Forex market as well. As is well known, we are now in a period of sky-high inflation, but how does this affect the Forex market?
The influence of inflation on the Forex market
To determine the influence of inflation on the Forex market, it is first useful to briefly explain what the Forex market is. In a Forex transaction, one currency is traded for another, the base currency (the Euro) is exchanged for a counter currency (foreign currency such as the Dollar).
This could look like this: 1 US dollar equals 1.17 Euro and is a simple exchange of value at a rate given by banks or foreign exchange agencies. The Forex market is open 24 hours a day, five days a week, Monday to Friday. Because investors often cannot check the market every minute of the day, many investors use Forex signals.
Now that it is clear what the Forex market is and does, it is also useful to explain the concept of inflation again. Inflation occurs when there is a general increase in the prices of goods and services, not just individual products; that means you can buy less today for one euro than yesterday. In other words, inflation causes the currency to lose value over time. This is what’s going on right now. Due to the war between Ukraine and Russia (and the resulting rising energy prices) and the aftermath of the corona crisis, inflation is sky-high.
When inflation rises too quickly, as it does now, currency values fluctuate. This can dramatically affect price differences, creating volatility and unpredictability. When there is such high volatility there are a number of things investors can do.
How can an investor respond to inflation?
One of the ways investors can deal with inflation is by using forex signals. By means of Forex signals or trading signals, an investor receives notifications when the market conditions meet certain pre-set conditions. These criteria are based on a trading strategy developed by the investor or the strategies or techniques of other professional investors. These notifications allow investors to buy and sell wisely, even in times of inflation.
If investors still find it too risky to continue investing in the Forex market, there are of course always other options that are slightly less risky. These are, for example, investing in bonds or putting money in a savings account. Bonds are basically proofs about loans. A bond is purchased and the issuer receives the money paid for the bond. In return, the bondholder receives interest. Bonds usually fluctuate much less than currencies or equities.
A second option is, of course, to simply put money in a savings account. This can work well in times of inflation because in times of inflation the Central Banks often raise interest rates. An increase in interest on savings accounts naturally makes it more interesting to put money in a savings account.
So to summarize this article briefly, inflation is currently very high. When inflation rises too quickly, as it is now, currency values will fluctuate. This can dramatically affect price differences, creating volatility and unpredictability. If there is such great volatility, there are a number of things that investors can do: use Forex signals or choose other options such as investing in bonds or putting money in a savings account.