Consumer price index (CPI) data and its measurement of inflation are integral to the daily lives of every citizen. It helps predict the price increases of goods and services, calculate employees’ salaries, and determine the cost-of-living expenses in a certain country.
However, CPI and inflation rates’ purpose go beyond our day-to-day lives as these economic data are fundamental to trading (no pun intended!)
This article tells you how CPI news releases and its inflationary pressures can help you gauge the potential market direction. You’ll walk through the concept of CPI, its significance to the forex market, and the sound strategies to trade CPI news.
How to Trade CPI News?
Let’s first review the most basic way of trading forex:
- Economic data influence the movement of currency markets with indicators like the GDP growth, inflation data, and unemployment rates.
- The economic health of a currency is integral in predicting market sentiment and future price direction.
- Central bank releases and monetary policy decisions are among the most significant news events that move markets.
Did you know these three can be tied with CPI news releases?
CPI news releases are integral to forex trading because they provide crucial information about inflation, influencing economic health, market sentiment, and central bank monetary policy decisions.
When trading the forex market during the CPI release, you can expect it to be highly volatile because of the influx of market participants (retail traders, whales, and institutional traders) trying to trade and profit from this news release.
News Trading Cardinal Rule: Trade Before the Release
If you’ve been trading currency pairs, you’ll know that news releases are catalysts for short-term market movement. However, the longevity of the trend it produces is never definite.
With that, you have to act fast if you want to trade a certain news release.
With that, you have to act fast if you want to trade a certain news release. It’s essential to position your trade on the market before the news drops.
But how would you do it? Should you simply take a guess about the possible CPI data?
Well, no! Placing any trades on the market by solely basing them on your guts is just a recipe for disaster.
After confirming a CPI news release through an economic calendar, you should start looking for reliable analysts and review their news forecast and analysis. You can also use a technical indicator that reflects the news market sentiment in your trading chart.
Significant forex swings can occur when releases don’t align with analyst’s expectations. Remember, unexpected changes in CPI can cause rapid shifts in currency values as traders react to new information.
Importance of Inflation and CPI Data to Forex Trading
CPI data and its measured inflation is extremely significant to the forex market because it concerns itself with the three core aspects of trading.
Due to its extensive impact on the market, CPI releases often drive-up market volatility as retail and institutional traders enter the market to profit from these releases.
Analyzing Economic Data
Every month, the Bureau of Labor Statistics releases CPI data for public reference about the country’s inflation outlook.
CPI releases are important economic indicators as they provide critical insights into the level of inflation— a fundamental economic indicator. Additionally, the inflation outlook often drives central banks from modifying monetary policy to adapt to the macroeconomic environment.
You should anticipate and analyze this news release because it will guide you into understanding the broader economic environment and its potential impact on currency prices and its relative strength against other currencies.
Forex trading often involves comparing economic conditions across different countries. You can analyze CPI data from multiple countries to determine which currency might strengthen or weaken.
Say the Japan CPI shows high inflation while the Eurozone CPI is stable, traders might expect the JPY to depreciate against the EUR.
Monitoring Currency Health
The health of a currency is closely tied to inflation rates. A rising prices of goods and services or high inflation can cause a currency to depreciate in value, while stable or low inflation can indicate a healthier economy and a stronger currency.
You can use the inflation data presented in any CPI release to gauge the health of a currency. If you’ve been trading currencies, you know their health is crucial in determining their potential forex movement.
Trading Central Bank Decision and Monetary Policy
Central banks use CPI data to make decisions about monetary policy, including setting interest rates. These decisions are major drivers of currency movements.
Forex traders monitor CPI to anticipate changes in monetary policy and adjust their trading strategies accordingly.
Moreover, CPI releases help traders form expectations about future economic conditions and central bank policies. This speculative aspect drives forex trading strategies and positions.
Analyze the Market Pre-Release
The pre-release of the CPI report is the most profitable period as traders speculate on the potential inflation data and its outlook.
However, you can rely on experts and economists CPI data prediction to supplement your analysis.
CPI releases come with market forecasts, known as consensus expectations. When the actual data deviates from these expectations, it often triggers significant market reactions.
- Above Expectations: Higher-than-expected CPI suggests stronger inflation, potentially leading to a central bank tightening monetary policy (e.g., raising interest rates), which may strengthen the currency.
- Below Expectations: Lower-than-expected CPI signals weaker inflation, which could prompt dovish policies (e.g., cutting rates), weakening the currency.
Tip: Use an economic calendar to track CPI announcements and review analysts’ forecasts.
Using Appropriate Position Sizing
CPI news release is known to move the price for hundreds to even thousands of pips.
To mitigate potential capital wipeout, a trader should take a conservative approach when trading the CPI news. This includes opening small leveraged positions to withstand an extremely volatile market movement.
Brokers usually offer 100:1 leverage to their traders; this means a trader can access a USD 100 trade with only a dollar. Beyond its profitability, leveraging exposes your position and capital to magnified risk.
Always align your position sizing to your risk-reward ratio and the market environment.
Read more: TradersUnited – All About Position Sizing
Proper Position Sizing in Action
Catherine has an account with 100:1 leverage and USD 50,000 running equity. The US Fed will release the monthly CPI data tomorrow, thus, she planned on opening a long position in EUR/USD at 1.2000 (currently at 1.1902.
| EUR/USD at 1.1902 | ||||
| Account | Trading Plan | Per-trade Risk | Trade Capital | Position Sizing |
| 100:1 USD 50,000 | Buy at 1.2000 | 1:3 risk-reward ratio 1% risk | ? | ? |
Catherine is still unsure about her position size. She knows the market’s volatility during this period, and a too-big size can wipe out her account.
However, a too-small size can yield her nothing but a wasted, unprofitable trade. She has to find a balance between profitable, safe, and manageable position size.
Aware of her per-trade risk management rules, Catherine decided to align her position size to the risk she would be willing to take in exchange for the potential reward.
With a 1.2% capital rule, she must only risk less than USD 600 on each trade. While her 1:3 R/R ratio suggests that for her risk money, she should gain USD 1,800.
| EUR/USD at 1.1902 | ||||
| Account | Trading Plan | Per-trade Risk | Trade Capital | Position Sizing |
| 100:1 USD 50,000 | Buy at 1.2000 | 1:3 risk-reward ratio 1.2% risk | USD 600 | ? |
With the data above, she can finally determine an appropriate size for her trade.
Based on her pre-analysis and economists’ prediction, the EUR/USD price will appreciate to 1.2400 for the first few hours of the CPI release. In other words, it will move 400 pip from her entry point.
Let’s look at the supposed return for each position size:
Formula: Potential Return = Pip value x Pip
| Lot Size | Computation | Potential Return |
| Standard Size (100,000 units) | USD 10 x 400 pips | USD 4,000 |
| Mini Size (10,000 units) | USD 1 x 302 pips | USD 400 |
| Micro Size (1,000 units) | USD 0.1 x 302 pips | USD 40 |
| Nano Size (100 units) | USD 0.01 | USD 4 |
Meanwhile, here are her required margins (capitals) for each position size:
Formula: Required Margin = (Trade size x Entry Exchange rate) / Leverage
| Lot Size | Computation | Required Margin |
| Standard Size (100,000 units) | (100,000 x 1.2000) / 100 | USD 1,200 |
| Mini Size (10,000 units) | (10,000 x 1.2000) / 100 | USD 120 |
| Micro Size (1,000 units) | (1,000 x 1.2000) / 100 | USD 12 |
| Nano Size (100 units) | (100 x 1.2000) / 100 | USD 1.2 |
Considering her 1% capital rule, she can’t open a standard position because she would be risking twice as much as she’s allowed to.
However, smaller sizes are insufficient to catch her prospective USD 1,800 reward.
What she can do is open five mini-sized positions. Her required margin still aligns with her 1.2% risk capital rule, as the trade would cost her USD 600.
Ultimately, the potential profit of the five positions would exceed her prospective reward.
Potential Profit = (Pip Value x Pip) x Number of Positions
Potential Profit = (USD 1 x 400) x 5
Potential Profit = USD 2,000
| EUR/USD at 1.1902 | ||||
| Account | Trading Plan | Per-trade Risk | Trade Capital | Position Sizing |
| 100:1 USD 50,000 | Buy at 1.2000 | 1:3 risk-reward ratio 1.2% risk | USD 600 | 5 Mini Lots (50,000 units) |
Using Oscillators for Momentum Analysis
The inherent market uncertainty remains the primary risk of CPI trading. While analysts and experts offer suggestions as to where the price will move, the release will be the ultimate truth-teller.
So, how can a trader position their trade while waiting for the CPI release?
They can supplement their fundamental analysis with the historical market. In other words, they can use technical analysis.
To identify the price direction after the release, you can analyze the traders’ pending or limited orders.
Technical indicators like order blocks represent market levels with concentrated buying or selling orders. These buying or selling pressures, once met, will certainly move the market.
Read more: Imbalance Forex Market: How Can You Trade It? [2024]
Consumer Price Index (CPI) Explained
The consumer price index (also known as the “Retail Price Index” or “Inflation Headline”) is an economic indicator used to gauge the cost of living of a certain county. To provide this data, CPI tracks the price change of the basket of goods and services consumed by the public daily.
Taking the current price for each good in the basket and weighting the figures together are the first step to calculating the CPI. It’s then divided by the value of the precious CPI data and multiplied to 100 to get it into a percentage.
But what exactly are the goods and services that goes into the basket of CPI?
- Shelter prices
- Food prices
- Energy prices
- Clothing prices
- Transportation fares
- Medical care fees
- Entertainment fees
- Education fees
Remember, CPI only measures goods and services bought or consumed daily by the public. What doesn’t fall under CPI are investment items like stocks, life insurance, and real estate.
Consumer Price Index (CPI) and Inflation Data
The consumer price index measures inflation— a sustained price increase of goods and services in a country. The balance between the two reflects one another. A high CPI figure suggests an increase in inflation rates, and a declining CPI data indicates a low inflation rate.
Essentially, when there’s an increase in CPI from the last month’s data, it indicates an increase in interest rates.
Central banks use CPI to gauge the inflation rate, essentially changing the currency’s interest rate to meet the set target inflation or at least at an acceptable level.
When the Bank of Japan (BOJ) wishes to increase its country’s inflation rate, the institution would lower JPY’s exchange rate to make JPY forex transactions affordable. This foreign attraction towards the currency increases its demand, boosting the currency transaction.
The same goes when a BOJ wants to lower the inflation rate, it would increase the interest rate of the currency. This creates a scarcity of JPY in the forex market because foreign transactions have become more costly than usual.
Did you know?
High inflation rate indicates a depreciating buying power of the currency. When inflation rises, a person needs more units of the currency to buy goods and services.
This does not only affect the purchasing power for these goods and services; but it also impacts the performance of the currency in the forex market.
Other Economic Indicators for Inflation
While the Consumer Price Index (CPI) is the most well-known measure of inflation, there are several other economic indicators that provide critical insights into inflationary pressures and trends.
These indicators, often used alongside CPI, offer a more comprehensive understanding of price changes across different stages of the economy.
Producer Price Index
The Producer Price Index (PPI) tracks the average change in prices that producers receive for goods and services at various stages of production, from raw materials to finished products. Unlike CPI, which focuses on consumer prices, PPI reflects inflationary pressures at the production level.
Why PPI Matters:
- Early Indicator of Inflation: Rising production costs often translate into higher consumer prices, making PPI a leading indicator for CPI movements.
- Sector-Specific Insights: PPI provides data across industries, helping traders understand which sectors are driving inflation.
For instance, if the PPI shows a significant increase in energy or raw material costs, this could signal future inflationary pressures that may affect consumer prices.
Employment Cost Index (ECI)
The Employment Cost Index measures changes in the business’ costs. These costs incur employee compensation, including wages, salaries, and benefits.
Labor costs are a major component of production expenses and can significantly influence inflation.
Why ECI Matters:
- Wage-Driven Inflation: When wages rise faster than productivity, companies may pass these higher costs on to consumers, leading to inflation.
- Monetary Policy Implications: Central banks monitor ECI closely as it provides insights into wage pressures that could influence inflation targets.
Import and Export Price Indexes
These indexes track changes in the prices of goods traded between countries, offering insights into how global trade influences domestic inflation.
- Import Price Index: Measures changes in the cost of imported goods and services. A rise in import prices, often due to currency depreciation or higher global commodity prices, can increase domestic inflation.
- Export Price Index: Tracks the prices of goods and services exported to other countries. Higher export prices can improve a country’s trade balance but may also reflect inflationary trends.
If a country’s Import Price Index rises significantly, consumers could face higher costs for imported goods, contributing to overall inflation.
GDP Deflator
The GDP deflator measures price changes for all goods and services included in a country’s gross domestic product (GDP). Unlike CPI or PPI, which focus on specific baskets of goods, the GDP deflator reflects inflation across the entire economy.
Why GDP Deflator Matters:
- Broad Inflation Measure: Provides a macroeconomic view of inflation, capturing price changes in consumer goods, investments, government spending, and exports.
- Economic Growth Insights: Rising GDP deflator values can indicate inflationary pressures tied to robust economic growth.
What Is Core CPI Data?
Core CPI excludes volatile components like food and energy prices to provide a more stable measure of underlying inflation trends. Central banks often prioritize core CPI data when making monetary policy decisions, as it offers a clearer picture of sustained inflationary pressures.
But why are food and energy prices excluded?
Simple – These categories can experience sharp price swings due to weather or geopolitical events, which may not reflect long-term inflation trends.
Wrapping Up: How to Trade CPI News
Inflation is not just a statistic; it’s a dynamic force that shapes economies and markets.
Understanding inflation and its indicators is essential to reduce market complexities and ultimately profit from it.
By analyzing these indicators, you can better anticipate market movements, assess economic health, and predict central bank actions such as interest rate adjustments.
