The Impact of Harmonised Index of Consumer Prices (HICP) on Forex
All over the world, there are millions of traders who engage themselves with Foreign Exchange or Forex. This is unlike other trading systems; Forex is not about trading any kind of physical or representative goods. Instead, Forex traders operate through the currency exchange market where they sell, buy, and exchange currencies of different countries or economies in the world.
In truth, Forex is a financial game where the trader needs to understand the bull and bear market. Regardless of the currency pairs used by the trader, there are events that impact Forex success. For those that trade GBP/USD, one of these events is known as the Harmonised Index of Consumer Prices or HICP.
The Harmonised Index of Consumer Prices Defined
The HICP indicates the price permanence and inflation for ECB, the European Central Bank. Harmonised Index of Consumer Prices is used to measure the changes of prices of goods and services. To gather the prices, all countries belonging to the European Union correspond with one another as they use the same methods. The ECB uses Harmonised Index of Consumer Prices in order for it to make evaluations especially when changes are required to be done on short term interest rates. This will enable them to correctly regulate and modify the inflation levels in economies in Europe.
Simply put, the Harmonised Index of Consumer Prices is the final cost paid by the European customers for a basket of goods, which include tobacco, meat, coffee, fruit, cars, household appliance, and other widely-used products and services. This also involves the costs of imported goods. This indicator is extremely important for several reasons including the fact that this serves as the basis for the European Index of Consumer Prices. It is mainly used to measure inflation particularly for the members of the Eurozone, but over the last few years, it is increasingly employed to index contracts that cover two or more EU Member States.
Price stability is determined through the HICP in which the ECB refers to as 2% a year. If the inflation rate goes over 2%, interest rates will possibly increase.
Why Investors Care about Harmonised Index of Consumer Prices
In many ways, inflation is considered an elusive adversary of central banks, not only in Europe but all across the globe. Progress has made it easier for banks to face their enemy. In 1973 to 1987, the inflation levels were almost 7.5%, but two years later and beyond, the inflation levels were much lower. Most of the time, it was only 3%. Traders who may have read the public documents of central banks will realise that these banks have their eye on containing inflation. Banks in Europe monitor inflation and they try to slow it down by means of raising the interest rates.
For Forex traders, higher rates usually mean that it is time for them to buy a currency. Inflation is definitely a big challenge for foreign exchange traders because it is quite difficult to track. Although this is the truth, there are indicators such as the HICP that can assist traders in potentially acquiring accurate inflation data.