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The FX Bootcamp Guide to Strategic and Tactical Forex Trading by Wayne McDonell

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INFLATION SENSATION

All economic announcements boil down to one thing: inflation. It is the enemy of central banks around the world. They combat inflation with interest rates. Interest rates are like a big money magnet. Inflation, and in turn interest rates, are what drives global money flow.
 
Inflation → Interest Rates → Currency Demand = Higher Valuation
 
Inflation is never a good thing. It makes prices rise. It can make prices rise in one of two ways:
1. Everyone is rich. Inflation of this sort occurs when everyone is doing well. They are happy and confidently spending their money. Times are good.
Because so many people are doing well and buying things, demand for goods and services is high. When shortages occur, prices rise ... sometimes out of control.
For example, in 2003 when interest rates in the United States were just 1 percent, money was cheap. A loan from a bank was very affordable. Therefore, vast numbers of people started to buy homes ... sometimes several of them. Hey, why not? Money was cheap and easy to get.
Demand for existing homes skyrocketed. Demand for new homes skyrocketed. Prices for both followed suit. This inflation of home prices was created by the fact that so many people had a lot of money.
Currently, the opposite is true in the U.S. housing market. Money is harder to get and is no longer cheap. Demand for purchasing homes is now low. Prices will fall. In November of 2007, housing prices had dropped more than 4 percent year over year. That ...

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