Influence of Central Banks in Forex Market

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The central bank of a country is part of the government, not like commercial banks in general, which are profit-oriented by investing their assets.

The central bank was established by the government to regulate and supervise commercial banks and financial institutions in order to prevent the consequences of poor performance.

In addition, the central bank is also tasked with carrying out government functions in carrying out its monetary system in order to meet the economic target to be achieved.

Central banks of countries whose currencies are widely traded in the forex market include:

  • The Federal Reserve (The Fed) is the central bank of the United States
  • Bank of England (BoE) is the central bank of England
  • Bank of Japan (BoJ) is the central bank of Japan
  • European Central Bank (ECB) is the central bank of European Union countries that use the Euro currency
  • Swiss National Bank (SNB) is the central bank of Switzerland
  • Bank of Canada (BoC) is the central bank of the Canada Reserve
  • Bank of Australia (RBA) is the central bank of Australia
  • Reserve The Bank of New Zealand (RBNZ) is the central bank of New Zealand.

The role of the Central Bank

The central bank plays a very important role in determining the direction of a country’s economy. Despite its independent status, the central bank is responsible for the sustainability of the country’s financial system.

The main tasks of the central bank are:

  • Maintaining the stability of the state financial system by regulating and supervising financial institutions.
  • Streamlining payment traffic by issuing currency and clearing between commercial/commercial banks.
  • Maintain government accounts and provide loans to the government when necessary.
  • As an agent for circulation of government securities.
  • Maintain the country’s foreign exchange reserves.
  • As a lender of the last resort or emergency assistance to commercial/commercial banks and financial institutions.
  • Determine monetary policy in order to achieve the inflation target, unemployment rate, and economic growth target by adjusting the interest rate, increasing or decreasing the circulation of money by buying or selling securities or bonds.

In the forex market that takes advantage of the strengthening or weakening of a currency, the influence of monetary policy from the central bank is certainly very large.

In addition, the central bank is also interested in the strengthening or weakening of the currency. When the inflation rate is high, the central bank tends to increase its interest rate so that the value of the country’s currency strengthens.

On the other hand, if there is deflation like in Japan, where prices at the consumer level continue to fall due to the strengthening Yen, the central bank has an interest in weakening the value of the Yen by lowering interest rates or buying large amounts of bonds.

Because the influence of central bank policy is quite high on the price movement of a currency pair, forex traders must pay close attention to what policies are being implemented and what steps the central bank will take, both in the short and long term.

It is also important to pay attention to the statements, content of speeches, or words during press conferences of high-ranking central bank officials.

As has happened several times, the euro fluctuated significantly when the ECB governor Mario Draghi gave a press conference, or the US dollar suddenly weakened when the Fed head Ben Bernanke gave a statement.

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