THE ROLE / IMPACT OF CENTRAL BANKS IN THE FOREX MARKET
Big banks are mostly responsible for controlling the rise in prices to make sure the economy keeps growing and stays stable. Sometimes, these banks will step in and make changes in the money market to follow their set rules. Traders who trade in foreign exchange keep a close eye on these changes so they can make money from the currency movements. This article talks about what big banks do and how their actions affect the global foreign exchange market.
WHAT IS A CENTRAL BANK?
National Banks are like super important banks that countries use to help them with their money stuff. They have a lot of power and can do things like control interest rates and make sure the country's economy is strong.
These banks do a bunch of things to help out in the money world.
Open market tasks: Open market activities (OMO) is when the government buys and sells government stuff (securities) in the open market to either increase or decrease the amount of money in the economy. It's like a big game of trading where the government tries to control how much money is floating around.
The national bank rate: The national bank rate, which is sometimes called the discount or government finances rate, is decided by a group of people who make decisions about money. They can choose to make the rate higher or lower to control how much money is being used. It might seem strange, but if the economy gets too hot and prices start going up too fast, the national bank wants to slow things down. National banks also act like a lender when there are no other options left. If a government doesn't have enough money and can't borrow from anyone else, the national bank can lend them some money to help them out for a little while. When the national bank is the lender of last resort, it makes investors feel more confident. They trust that governments will be able to pay back their debts, and this helps to lower the cost of borrowing money for the government. Foreign exchange traders can keep track of what the national bank is doing by looking at the national bank schedule.
Significant CENTRAL BANKS
Central Bank (United States)
American banner addressing the US national bank
The Federal Reserve Bank, also known as The Fed, is like the boss of all the money in the world. They have a big say in how the US dollar and other currencies behave. That's why people pay a lot of attention to what they do. The Fed's main goals are to keep prices steady, make sure people have jobs, and keep interest rates low for a long time.
European Central Bank (European Union)
Hey there! Let's talk about the European Central Bank (ECB) and what it does. So, the ECB is like a special bank that works for all the countries in the European Union. Its main job is to make sure that the Euro, which is the money used by many countries in Europe, stays valuable and doesn't lose its worth. The Euro is actually the second most popular currency in the whole world, so it's really important for people who trade money.
Bank of England
English banner addressing the Bank of England
The Bank of England is like the big boss of money in the UK. It has two important goals: to keep our money safe and to make sure our economy stays steady. They use a special model called Twin Peaks to do this. It's like having two mountain tops, but instead of mountains, we have the Financial Conduct Authority (FCA) and the Prudential Regulating Authority (PRA). These two groups help the Bank of England keep an eye on all the money stuff. They make sure that companies that handle money have enough money saved up and are careful with risks. So, the Bank of England is like a superhero for our money!
Bank of Japan
Japanese banner addressing the Bank of Japan
The Bank of Japan has been really into making sure that the money stuff is strong and steady. They've been keeping interest rates super low (like, below zero!) to try and make the economy better. When interest rates are below zero, it means people can actually get paid to borrow money. But, on the flip side, it's not so great for people who want to save money because they might have to pay a fee for keeping their money in the bank.
National BANK RESPONSIBILITIES
National banks have been set up to satisfy a command to serve the public premium. While duties may contrast between nations, the fundamental obligations incorporate the accompanying:
1) Achieve and keep up value dependability: Central banks are entrusted with securing the worth of their cash. This is finished by keeping a humble degree of swelling in the economy.
2) Promoting monetary framework soundness: Central banks subject business banks to a progression of stress testing to decrease foundational hazard in the monetary area.
3) Fostering adjusted and supportable development in an economy: when all is said in done, there are two principle roads in which a nation can invigorate its economy. These are through Fiscal strategy (government spending) or money related approach (national bank intercession). At the point when governments have depleted their spending plans, national banks are as yet ready to start money related approach trying to animate the economy.
4) Supervising and controlling monetary organizations: Central banks are entrusted with the obligation of managing and overseeing business banks in the public premium.
5) Minimize joblessness: Apart from value solidness and reasonable development, national banks may have a premium in limiting joblessness. This is one of the objectives from the Federal Reserve.
National BANKS AND INTEREST RATES
National banks are like the bosses of all the banks in the country. They decide how much interest everyone has to pay when they borrow money. This includes things like personal loans, home loans, and credit cards. The interest rate set by the national bank is the rate that business banks have to pay when they borrow money from the national bank for a short period of time.
This affects us because the business banks charge us a higher interest rate than what they pay to the national bank. So, they make money by lending us money at a higher interest rate and paying less interest to the people who give them money.
Business banks need to borrow money from the national bank because they have a special way of banking called Fractional Reserve Banking. They take our money as deposits and then lend most of it to other people and businesses who need money. But they have to make sure they always have enough money to give back to us when we want to withdraw it.
The national bank sets rules for how much money the business banks have to keep as a reserve. If the bank doesn't have enough money, it can borrow from the national bank at the overnight rate, which is based on the yearly national bank interest rate.
People who trade in foreign exchange (FX) pay close attention to national bank interest rates because they can have a big impact on the forex market. Institutions and investors usually follow higher interest rates, so if the rates change, traders will invest more in countries with higher interest rates.
What CENTRAL BANKS Mean for THE FOREX MARKET
Hey there! So, here's the deal: Forex dealers, who are like the money experts, always pay attention to what the boss of the national bank says. They listen carefully to the words he uses to figure out if the bank is going to raise or lower interest rates. When they think the rates will go up, they call it "Hawkish." And when they think the rates will go down, they call it "Dovish." These little hints are called "forward direction" and they can actually make the forex market move.
Now, if the dealers believe that the national bank is going to increase interest rates, they will make a long trade with that currency. But if they think the bank will be cautious and not do much, they will try to short the currency.
If you want to learn more about this stuff, you can read about "Financing rates and the Forex Market." It's pretty interesting!
Oh, and by the way, when the national bank changes its interest rates, it gives traders a chance to make trades based on the difference in interest rates between two countries' currencies. These traders, called "carry traders," hope to earn money by trading a currency that gives high interest rates with a currency that gives low interest rates. Cool, right?
Get familiar with FOREX FUNDAMENTALS
Check out this cool schedule from the national bank! It shows all the important dates when the national banks will announce their interest rates. If you want to stay updated with the latest news and announcements from the national banks, you can use our financial schedule. When important news is released, it can cause big changes in the FX market. But don't worry, you can manage your risks by learning how to trade the news. If you want to learn more about forex trading and start your journey to becoming a successful trader, you can download our free guide called "New to Forex." It's a great way to get started!