Forex traders that use fundamental analysis for making trade decisions, especially in determining swing trade ideas, monetary policy decisions and central bank statements provide good clues in forecasting price behavior of currencies. After all, it is the central bank officials that decide on the level of interest rates and money supply. In turn, these determine the rate of return on the country's currency and the supply of cash circulating in the economy. This is also why forex traders often keep close tabs on economic releases, as these help them predict if a currency is about to rally or drop.
Strong economic data reflects good economic performance, which can lead the central bank to hike interest rates or reduce the amount of cash circulating in the economy. In doing so, the lower supply of the currency in circulation boosts its value while the increase in interest rates translates to higher returns in holding the currency. All in all, these factors translate to an increase in demand for the currency, therefore increasing its value.
On the other hand, weak economy data reflects poor economic performance. This can push the central bank to cut interest rates or increase the amount of cash circulating in the economy. In turn, the increased supply of the currency in circulation lowers its value while the cut in interest rates results in lower returns in holding the currency. When combined, these factors result to a decrease in demand for the currency, thereby decreasing its value.
This explains why traders usually monitor monetary policy statements and central bank interest rate announcements. Other than showing if the central bank decided to change interest rates or asset purchases, central bank officials' assessment and predictions for the economy are also typically included. In fact, some central bank governors hold press conferences right after the actual announcement in order to shed more light on their monetary policy plans. They can even talk about the factors, such as employment or inflation, that can influence their decision to change interest rates or money supply.
Speeches and interviews by central bank officials also tend to contain helpful clues on future monetary policy. When a policymaker or voting committee member is quoted saying that further quantitative easing is likely, the corresponding currency tends to sell off sharply as traders anticipate and price in an actual monetary policy move. This is why testimonies by important central bank officials are usually marked on the forex calendar, as traders tend to pay close attention to their remarks.
Strong economic data reflects good economic performance, which can lead the central bank to hike interest rates or reduce the amount of cash circulating in the economy. In doing so, the lower supply of the currency in circulation boosts its value while the increase in interest rates translates to higher returns in holding the currency. All in all, these factors translate to an increase in demand for the currency, therefore increasing its value.
On the other hand, weak economy data reflects poor economic performance. This can push the central bank to cut interest rates or increase the amount of cash circulating in the economy. In turn, the increased supply of the currency in circulation lowers its value while the cut in interest rates results in lower returns in holding the currency. When combined, these factors result to a decrease in demand for the currency, thereby decreasing its value.
This explains why traders usually monitor monetary policy statements and central bank interest rate announcements. Other than showing if the central bank decided to change interest rates or asset purchases, central bank officials' assessment and predictions for the economy are also typically included. In fact, some central bank governors hold press conferences right after the actual announcement in order to shed more light on their monetary policy plans. They can even talk about the factors, such as employment or inflation, that can influence their decision to change interest rates or money supply.
Speeches and interviews by central bank officials also tend to contain helpful clues on future monetary policy. When a policymaker or voting committee member is quoted saying that further quantitative easing is likely, the corresponding currency tends to sell off sharply as traders anticipate and price in an actual monetary policy move. This is why testimonies by important central bank officials are usually marked on the forex calendar, as traders tend to pay close attention to their remarks.
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Monetary policy statements and central bank decisions play a major role in determining if a currency is about to appreciate or depreciate. Learn more about how these events affect forex trading read more here.
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