Joining a foreign currency exchange market is not easy, and many factors can confuse newbies about how exactly it works. The same goes for the role of central banks in FX, as their actions often prompt prices to go up or down, sometimes tremendously. Every forex trader who works with forex rebates brokers and the market should understand how they impact the currencies. In this article, we will break down what central financial authorities are and how their decisions affect the Forex market.
About Central Banks
Every country has a certain fiscal system. A central bank is what establishes and controls the system. So, there is one financial authority in every country. For example, there are:
- the Federal Reserve (Fed) in the United States;
- the European Central Bank (ECB) in Europe;
- the Bank of England (BoE) in the UK;
- the Bank of Japan (BoJ) in Japan.
These entities take everything related to the economy under their wings. This includes inflation, interest rates, money supply, and financial crises.
How Central Banks Affect FX
Naturally, central financial authorities play a crucial role for traders, as they are professionals who invest in currencies and get cashback from services like FxCash.
Despite that, financial entities don’t actually participate in market activities. It’s just their announcements and policy changes that impact the traders who want to receive a good return on their investment. For example, central banks are the ones raising interest rates, which attracts more investors and strengthens the local currency.
Another great illustration of the influence is simple announcements. Even if there are no changes made yet, even the smallest statement can shift the narrative. Traders listen to every word about the economy. So, if a major financial entity in Europe says the local economy is slowing down, the Euro will instantly become less valuable.
But not everything the entities do is subtle. They have the power to control the price of the currency. Once a bank notices that the local currency is not as strong as it was before, it can buy it to make it more powerful. While it’s a rare occasion, some financial authorities still do it, and the market follows closely.
Why Forex Traders Pay Attention to Central Banks
As a newbie, you may think that a lot of traders just guess which currency pair to trade. But FX users make informed decisions, always based on the information from major financial entities. Central banks also matter a lot — they give big hints on where one or another currency will move. Policies established can either create or disintegrate market opportunities, and you can’t be a forex trader without following the news.
Follow Central Banks for Successful Trades
When you check the latest financial news, you probably won’t find any central banks in the headlines. Yet, these economic entities are responsible for the biggest changes in the Forex market. They set interest rates, release major news, and can intervene with the market directly if needed. If you are planning to join the trading scene, you have to keep your ears open to any central bank announcements.
