💵 Money Supply (M2) — The Fuel That Drives Inflation and Currency Trends
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💵 Money Supply (M2) — The Fuel That Drives Inflation and Currency Trends

28 November 2025, 13:19
Issam Kassas
Issam Kassas
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💵 Money Supply (M2) — The Fuel That Drives Inflation and Currency Trends

💡 The Lesson

If interest rates are the engine and inflation is the speed, then money supply is the fuel tank.
When a central bank prints or removes money from the system, it changes everything:
inflation, spending, credit, and ultimately — the strength of a currency.

Understanding M2 helps you see the deep fundamentals behind long-term currency moves.

📊 What Is M2 Money Supply?

M2 measures the total amount of “spendable” money in an economy:

  • Cash

  • Checking accounts

  • Savings accounts

  • Small deposits

It does not include large institutional money — just the liquid money that consumers and businesses use daily.

📈 When M2 Rises:

  • People have more money

  • Spending increases

  • Inflation rises

  • Central banks turn hawkish
    → Currency strengthens short term, weakens long term

📉 When M2 Falls:

  • Spending slows

  • Inflation cools

  • Risk of recession increases

  • Central banks turn dovish
    → Currency weakens short term, stabilizes long term

🏦 Why M2 Moves Forex Markets

A rapidly expanding money supply means more currency in circulation —
and more supply usually means lower value over time.

But here’s the twist:
When M2 expands too fast, inflation spikes → central banks raise rates → currency strengthens short term.

That’s why M2 is a two-phase indicator:
🔥 Short term: inflation fear → rate hikes → stronger currency
📉 Long term: oversupply → lower value → weaker currency

⚙️ Example in Action

2020–2021 (U.S.):

  • M2 exploded due to stimulus.

  • Inflation surged months later.

  • The Fed tightened aggressively.
    → USD strengthened massively.

Later, as liquidity began to contract…
→ USD lost momentum.

This is the real M2 cycle.

🔑 Pro Tip — Watch M2 Year-over-Year Growth

A healthy annual growth rate: 5–7%
Above 10% → inflation risk
Below 3% → recession risk

Combine this with CPI, GDP, and interest rates for a complete macro picture.

🚀 Takeaway

Money supply is the bloodstream of the economy.
Too much → inflation.
Too little → recession.
Learn to track M2, and you’ll see market moves weeks or months before they hit the charts.

📢 Join my MQL5 channel for more forex fundamentals and real-world trading insights:
👉 https://www.mql5.com/en/channels/issam_kassas