The Role of Central Banks in Foreign Exchange Market

Daffa Zaky  |

There are many different ways to trade on the Forex market from technical analysis, fundamental analysis, automated systems and signal providers but the reasons behind why the market moves remain the same. Although the currency market moves in what might appear to be an erratic pattern when you look at the reasons the market has moved it becomes clear. The biggest underlying reason is the monetary policy of the central bank that the base currency is related to.

When you trade forex, you trade one currency against another so in effect you are trading a push, pull situation. Very rarely do central banks release monetary policy information at the same time, so it is easy to assume that the currency pair will move dependent on the information being released from a particular central bank.

It is the central banks' job to control a countries economy through monetary policy; if the economy is moving slowly or going backward, there are steps the central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all involve injecting more cash into the economy. The simple supply and demand economic projection occur and currency will devalue.

When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank do or in fact don't do will affect the currency of that country. Sometimes it is within the central banks' interest to purposefully effect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high importers of that countries commodities will seek cheaper supply; hence directly effecting the economy.


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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