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How Central Banks Impact the Forex Market

How Central Banks Impact the Forex Market

Central banks around the world are tasked with regulating their respective national monetary systems with the view to keeping inflation in check, supporting economic growth and promoting financial stability.

The decisions made by the biggest central banks such as the Bank of England and Federal Reserve (USA) have a direct impact on the forex market. This is because the tools they have at their disposal, such as raising or lowering interest rates, affect activity within the market.

Being able to analyse the policies and actions taken by central banks is part of fundamental analysis. Forex day traders should always keep an eye on economic, social and political factors that can change the prices of currencies. The changes can happen quickly and knowing when to enter and exit the market based on new insights is crucial to making profitable trades and mitigating losses.

Interest Rates

Central banks often intervene to change interest rates when they deem it necessary. An interest hike is often enacted to ease inflationary pressures, while a reduction in interest rates, which cuts the cost of borrowing, is commonly used to stimulate economic growth.

For forex traders, interest rates also have an impact on the interest accrued on investments. This can help to increase profits. On the flip side, currency inflation can also limit any additional returns from interest.

For fundamental analysis, interest rates offer a clear indication of monetary policy, which can then be used to inform trades. Traders usually track at least the four main banks that feature in major currency pairs. These are the European Central Bank and Bank of Japan in addition to the aforementioned banks in the UK and USA.

Economic Calendar

Central banks also feature heavily on the economic calendar that forex traders follow for news. These announcements are similar to interest in that they can point to the future direction of the market. Central banks have “meeting dates” that take place each month and the news from each can have a major impact on financial markets.

Institutional Traders

Even though they don’t have a profit motive, central banks can become an active participant in the forex market when they sell off foreign currency reserves. When this happens, they are acting as an institutional trader and their activities can affect the flow of the market.

Retail traders that want to act on new opportunities that arise in forex first need to select a reputable broker and install a trading platform. The coinlife review will give you a complete rundown of the features, instruments and service on offer. You should also keep up with the latest developments in the forex industry by reading worldwide trading news on a daily basis.

To conclude, central banks have a major impact on the forex market, primarily through their decisions to either increase or cut interest rates depending on the state of the economy. They can also change the quantity of money that is circulating to control a currency’s value. Being able to interpret and act on these developments and announcements is the key to successful forex trading.

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