Central Banks

About the World’s Central Banks

When it comes to trading, everything is related to what a central bank is doing.
Should you be interested in trading either equities or stock indices, then you’re looking for when the respective central bank is about to release its monetary policy. If trading in the forex market then news from both central banks (those associated with the two currencies forming the pair) is vital to making a trade decision.

Central banks meet on a regular basis (monthly, every six weeks, etc.) in order to assess the economic situation of that respective economy, and setting the interest rate and monetary policy for the period to come. Conductive to this, the bank will take into account previous economic releases for projection.

Knowledge of any forthcoming changes to a country’s interest rate is crucial to a trader. If the rate is raised, it is a positive for the region’s currency and negative for the general market. Likewise, the opposite is true; if the interest rate is cut then this is negative for the respective currency and positive for the general stock market.

Each central bank has a mandate and the main directive for the biggest central banks in the world is to keep inflation below, or close to, two percent. No meaningful economic growth is achieved if inflation is far higher or lower than the two percent target.

The Importance of the FED

Forex pairs are classed according to their composition and global significance/influence. Those with the USD on one side and another primary leading currency on the other (such as the USD/EUR or USD/GBP) are called majors. Those paired without the USD present are minors or crosses. Currencies from emerging economies paired with the USD, form exotics.

The US dollar is the world’s reserve currency, and with so many forex pairs influenced by the health of the USD, this makes the central bank of the United States – The Federal Reserve of the United States (or Fed) – the most important central bank in the world.

In comparison to other major central banks, the Fed has a dual mandate. Besides the inflation target, the bank is looking to create jobs as well. This makes jobs related news extremely important and the release of the NFP (Non-Farm Payrolls data) pivotal to all traders, regardless of which financial product is being traded.

Other Leading Central Banks

Of course when trading any pair, you’ll want to take into consideration both sides of the coin. Many of the world’s leading banks carry plenty of weight and are capable of swaying the market just as effectively with the release of their minutes.

Following the Fed in order of importance are the Bank of England (BOE) and the European Bank (ECB). Both meet on a regular basis, and their monetary policy release date is vital to the health of the EUR or GBP.

The RBA (Reserve Bank of Australia), RBNZ (Reserve Bank of New Zealand), BOJ (Bank of Japan) and SNB (Swiss National Bank), complete the world’s heavyweight central banks list. When trading in the financial market, an awareness of their statement release dates on the economic calendar is also imperative to major and minor pairings.