When Forex Trading it’s important to know the interest rate policies of the major central banks. For example if you have a bias to be long GBP you should know their current policy on interest rates. Inflation is the enemy of central banks they deal with it by changing interest rates.

While Forex Technical Analysis is an important piece of a traders arsenal so is carrying out some brief Forex Fundamental Analysis, you will then appreciate higher interest rates are a money magnet. Inflation and then interest rates are what drives global money flow.

                                                              Inflation + Interest Rates = Currency Demand = Higher Value

While this information isn’t as important to Forex Day Traders who use Technical Indicators to profit in the Forex Market it is vital for swing and position traders who use longer term Trading Strategies. Inflation is not a good thing as it makes prices rise to quickly. When everyone has plenty of money and times are good people are happy and freely spending their cash. Demand for services and goods are high. When a shortage occurs, prices rise.

For example in 2003 interest rates in the US were only 1% money was cheap to borrow. A loan was affordable because of this people started to buy homes and who can blame them, money was cheap and accessible. The demand for existing and new homes increased rapidly, prices increased due to the demand. This inflation of house prices was created by people having access to cheap money, which in turn leads to them having more cash to spend.

The other way inflation makes prices rise is when money is worth less. This time prices rise not because people are doing well. They rise because people lose confidence in a currency, when this occurs the value of the currency falls. If one Pound buys only half the services and goods it used to, people have to spend more to get less. If you buy something from a shop the owner they may feel it isn’t worth replacing the stock you have just purchased because he has to pay more for it as the local currency has decreased in value.

How to Trade Forex successfully? Have solid Trading Strategies and good knowledge of the current inflation situation and interest rate policies of the countries’ currency you wish to trade.

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