Psychology behind inflation and price action--

Now that's all well and good, but what's the practical application and lesson for us traders? There are several lessons, especially for any traders who tried to buy the dollar or yen against the majors and crosses for lack of understanding how the underlying fundamentals of the markets drive price action. The main lesson has to do with sentiment, specifically, how inflation data drives market sentiment which drive money-flows... it's a pretty simple correlation and it goes like this:1. Higher prices for finished goods leads to:2. Higher usage of commodities to produce finished goods which leads to:3. Higher prices for commodities based on higher demand and usage which leads to:4. Producers passing their higher costs to the end user which leads to:5. Higher consumer inflation Think about it this way... when you combine the factors of a product costing more to produce and being in higher demand, the price has to go up and when more finished goods are being produced it also means the costs of those commodities used to produce and bring to market also go up accordingly, if all of those prices are going up they will get passed on to the consumer. So that means CPI could go up and when CPI and PPI both go up, commodities go up, and when commodities go up, equities go up. When the prices of both commodities and equities go up, higher-risk and higher-yielding currencies like the EUR, GBP, and AUD all go up. Wall St. needs inflation, bottomline. What's good for Wall St. is good for the EUR/USD and its higher-yielding comrades and bad for the USD. That's the psychology behind the fundamental factors for how good inflation data would cause bullish sentiment and positively effect money-flows into markets that offer the promise of better yields and higher returns in the future. Now, today was about as beautiful an example as we've seen in awhile for how good inflation data can cause a market rally, it doesn't always work so smoothly and succinctly, but I think it's important for traders to have a good fundamental understanding for how this all works. When the big money movers look at data like PPI, that's what they are thinking and their thinking leads to stronger risk appetites and a healthier demand for better yields.