Central Banks

Description

Most countries worldwide have a Central Bank, which can play a very prominent role in forex trading-one that essentially steers the value or perceived value of national currencies.

A Central Bank's key functions include issuing national currency, acting as a banker to their country's government and to commercial banks, managing inflation, altering interest rates, and maintaining stability for the exchange rate.

By foerex trading their own nation's currency in the open market, Central Banks can exert some control over the exchange rate and consequently protect against unfavorable levels of appreciation or depreciation. Their primary role is to maintain financial stability and to promote national economic goals.

FX Trading Importance

Forex trading is heavily influenced by Central Banks. Various monetary management tools impact local economies and the value of local currency. Too much money in the supply can lead to inflation and a drop in currency value. Tight monetary policy may lead to a liquidity squeeze, which can exert upward pressure on interest rates. These higher interest rates attract more investors to government paper and help the local currency increase in value.

Prices reflected on forex trading platforms can be directly affected by Central Banks, which will buy and sell their currency at the spot market in an effort to keep rates from changing too drastically. Keeping local currency at a stable price also makes it more attractive for trade; too much appreciation is actually less appealing to importers involved with FX trading-currency that remains even keel is the most attractive.

A forex broker or trader won't know what exact percentage of the market is made up of such Central Bank transactions, however, the institutions are often closely monitored because they can have a much larger impact on the market than single commercial banks can have.

A Central Bank's management of the credit system also instills international confidence in the nation's economy and finances. Health and stability are what a good forex broker or capitalist will often look for when investing.

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Related Forex Trading Indicators

Most forex trading professionals will pay attention to the announcements and operations of the central banks concerned with major currencies. These include: The Bank of England, the European Central Bank, the Reserve Bank of Australia, the Swiss National Bank, the Bank of Japan, the Reserve Bank of New Zealand and the United States Federal Reserve, or Fed.