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.
Economic reports that come in better than expected or post improvements are indicative of strong economic performance, which usually convince central bank leaders to increase interest rates or lessen money supply, as the economy can do without monetary stimulus. With that, the decreased amount of currency in circulation results to an increase in its value. In the meantime, higher interest rates mean higher returns for holding the country's assets and currency. This eventually boosts currency demand and allows it to appreciate in 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.
In addition, testimonies and media interviews of policymakers also influence forex price action as their remarks could be treated as clues for upcoming monetary policy decisions. A central banker can drop some comments saying that more asset purchases are necessary and this can lead to a strong selloff in the corresponding currency, as traders use these clues to price in their speculations for actual policy decisions. This explains why central bank speeches are typically included in forex economic calendar events.
Economic reports that come in better than expected or post improvements are indicative of strong economic performance, which usually convince central bank leaders to increase interest rates or lessen money supply, as the economy can do without monetary stimulus. With that, the decreased amount of currency in circulation results to an increase in its value. In the meantime, higher interest rates mean higher returns for holding the country's assets and currency. This eventually boosts currency demand and allows it to appreciate in 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.
In addition, testimonies and media interviews of policymakers also influence forex price action as their remarks could be treated as clues for upcoming monetary policy decisions. A central banker can drop some comments saying that more asset purchases are necessary and this can lead to a strong selloff in the corresponding currency, as traders use these clues to price in their speculations for actual policy decisions. This explains why central bank speeches are typically included in forex economic calendar events.
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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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