Understanding the Role of Central Banks in the Forex Market

The number of players in the Forex market tends to formulate into a vast list. Apart from the abundance of players, the market also varies in terms of the type of player. Yes, that’s right. From commercial to investment banks, the market has players ranging from the same category. So today, we will be looking into one such player and understanding its role in the market. Since aspects are quite clear from the heading, let’s dig into the matter and speak about Central banks and their association with the Forex market.


The Introduction

Central banks tend to represent a nation’s government and thus, are extremely valuable players in the market. The many policies that they introduce like open market operations and interest rate policies influence currency rates to a considerable extent. As Central banks are responsible for fixing the price of the native currency on Forex, it stands to be the exchange rate regime through which the currency will be traded in the open market.


Central banks do not facilitate action for purposes that do not include stabilization and competitiveness of a nation’s economy. As a result, these banks tend to get involved in currency interventions in order to make their respective currencies appreciate or depreciate. For this purpose, numerous strategies come into the picture, and its impact serves as a long- term indication for all Forex traders.


A Trader’s Duties

As a Forex Trader, it is quite essential to be aware of the many moves carried forward by Central banks. A good economic calendar can be of great help on this front and will be beneficial regardless of the analysis used throughout trading. By doing so, you will be able to expect the right moves from the Central bank during deflationary trends and other such instances. With a move to make exports all the more competitive, Central banks often weaken their currency by creating additional supply during such periods. If an investor is aware of such forms of action, then he/she will be mindful of the right moves that need to be implemented.

Central Banks

Major Central Banks


1. U.S. Federal Reserve

With more than 85% of all currency transactions done with the U.S. dollar, it is no surprise that its federal reserves is one of the biggest in the world. It is the most highly traded currency, and the Fed is considered to be influential.


2. Bank of England

Bank of England is another major Central bank whose primary goal is to maintain financial and monetary stability. Their committee, known as the Monetary Policy Committee, is responsible for setting monetary policy and has a total of nine members. With the aim to keep inflation within a limit, the bank carries forward it’s day to day functions.

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