Inflation plays a crucial role in forex markets because it directly impacts a currency's value and purchasing power. When a country experiences high inflation, its currency tends to depreciate as the increased cost of goods and services reduces its attractiveness to foreign investors. Central banks often respond to rising inflation by adjusting interest rates—higher rates can strengthen the currency by attracting foreign capital, while lower rates may weaken it. Forex traders closely monitor inflation indicators like the Consumer Price Index (CPI) and Producer Price Index (PPI) to predict central bank policies and currency movements. For example, if inflation in the U.S. rises faster than in the Eurozone, the Federal Reserve may hike interest rates, boosting the USD against the EUR. Conversely, unchecked inflation can erode economic stability, leading to capital flight and currency devaluation. Thus, inflation differentials between countries create trading opportunities, as forex markets constantly adjust to shifting price levels and monetary policies. Traders who anticipate inflation trends can capitalise on exchange rate fluctuations, making inflation a key driver in forex strategy and long-term currency valuation.