“The CPI of a country no matter how small they are, always have a ripple effect on the value of currencies involved.”
Over the years, Forex traders have devoted much of their time to closely monitor inflation through the Consumer Price Index, which also serves as a fundamental economic indicator. The CPI index gives details about the historical average prices that consumers paid a basket of market goods and shows if consumers are paying higher or lesser for the same goods.
The fact that inflation tends to result in a low purchasing power of money in an economy, the apex bank of many economies, control it by typically raising interest rates to combat higher inflation, and lowering interest rates in deflationary situations.
Economic experts usually use the CPI level to assess the level of inflation prevailing in a country's economy, that relates to the cost of goods and services to a typical consumer.
In most cases, the CPI data is often used by experts to compute cost of living, increase in wages; and determine a suitable price increase for goods and contracts by businesses.
For Forex traders, the CPI is very important since it can influence a nation's monetary policy, especially when it deviates from its normal values.
For instance, the Canadian CPI in November 2014, beat market expectations of 2.2% and came in at 2.3%, subsequently affecting the Canadian Dollar to trade up to a six year high against the Japanese Yen.
In other words, if the CPI of a country comes out above the market's expectations, it will likely increase the value of that country's currency. However, if there is a decrease or it comes below the market's expectations, it will also affect the value of that country's currency.
Additionally, if there is any deviation in the most recent number from expectations that leads to Forex market volatility, a revision of the previous numbers can also have a significant market impact.