The central banks are responsible for setting the monetary policies of a country, and this makes them the gods over currency. If you want to know how strong a certain country’s currency is going to be, just look at what that country’s central bank is doing. Since the Forex market is all about judging how strong one currency is going to be compared to another, you have to watch the central banks’ decisions.
However, with so many central banks around the world, you can’t keep track of all of them, otherwise you would go mad. So, just keep your eyes on the main central banks, those that control the world’s largest economies such as:
The FED is the central bank of the US, and it sets the monetary policies for the largest economy in the world. Besides the US economy, it determines the strength of the US dollar, which accounts for almost 80% of all Forex trades. As such, the decisions on monetary policies set by the FED are extremely important to every Forex trader.
The two most important announcements made by the FED that affect the strength of the US dollar include the interest rate decision and federal borrowing of funds. Interest rates control inflation within the country, and the higher the interest rates, the stronger the US dollar gets. For example, the FED raised interest rates for the first time in 2016 on the 14th of December in an attempt to rein in inflation to the 2% target. The interest rates were raised from 0.50% to 0.75% causing the US dollar to rise in value.
Then, the FED once again raised interest rates on the 15th of March 2017 to 1.00%, but this caused the dollar to weaken. This is why you need to consider the central bank meetings’ announcement in detail. The main reason for the dollar’s slide was the dovish statement by FOMC members who indicated that the economy was stable and the FED would not have to raise interest rates further any time soon.
Anyway, the FED holds 8 such meetings every year to announce their decision, and the next meeting will be on the 2nd of May during which the markets expect interest rates to be held at 1%.
Just like the FED, the ECB also holds 8 meetings annually to announce their monetary policies. Being in charge of the entire Eurozone and controlling the value of the euro, the ECB meeting is also crucial to the Forex markets.
The ECB has been very accommodative for the past few years since the global economic crisis in 2008. For the past year, they have kept interest rates at 0.00% since the 9th of March 2016. Before this date, interest rates were at 0.05% which was already low, but they lowered the rates further to stimulate the economy.
Besides interest rates, the ECB has been engaging in a stimulus program which involves bond buying. In 2016, the ECB bought €80 billion worth of bonds every month, but they will decrease the quantity to €60 billion per month from April. This bond buying program is expected to continue until the end of 2017.
However, the ECB may have to cut down on its accommodative monetary policy sooner than they expected due to the rising inflation now at 2% while the target is 1.7%. Every trader should keep an eye on the next ECB meeting for any hawkish sentiment from the members, especially Mario Draghi.
The UK is also a very large economy, and the decisions made by the ECB will affect the value of the sterling pound. The BoE’s decisions will have a huge impact on the strength of the sterling pound, as can be seen from their past decisions:
The BoE kept interest rates steady at 0.25%, although some of the members expressed concern about rising inflation. This hawkish sentiment hinted that a rate hike by the BoE may be on the cards soon, and the sterling pound became stronger.
However, the biggest moves on the sterling pound will come from the Brexit talks that are expected to begin next week on the 27th of March 2017. These will set the tone for the pound’s performance for the next 2 years, and the BoE will have to keep adjusting their rates so that the British economy remains stable throughout the process.
Other central bank meetings
The 3 central banks listed above are the top 3 which make up the highest traded currencies, but there are other currencies from emerging economies and even developed ones that affect the Forex market. These are the ones to watch:
- Bank of Canada (BoC)
- Bank of Japan (BoJ)
- People’s Bank of China (PBoC)
- Reserve Bank of Australia (RBA)
- Reserve Bank of India (RBI)
You can always find all the upcoming central bank meetings from sites like topbrokers.com , Fxstreet.com, FxEmpire.com, TradingView, which have a Forex calendar so that you don’t miss any important announcement.
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