It is not enough to learn about economic indicators when you are trading in the Forex market. Before you get into the market moving indicators, it is important to understand the mandates of the different worldwide central banks and their roles. Worldwide central banks will impact the currency you are trading because they will tremendously impact the sentiment just with a change of interest rate decision or monetary policy decision or any central bank intervention to the Forex market.

You will lose money in the long term if you skip learning about any important currency market drivers. So you have to learn all the fundamental facts around the world. I know it is not very simple, and that’s why most retail traders are ignoring this stuff of trading. Believe us if you take a keen interest in it we are there to make you a successful trader and you will definitely become a master of fundamental analysis along with technical analysis.

While different central banks have different mandates, they have a couple of functions in common. Central banks are known as the lenders of last resort. Because aside from being responsible for regulating the country’s money supply through monetary policy tools, they can lend money to commercial banks, especially during financial crises or tight banking conditions.

In the world of central banks, there is a certain phrase that is commonly used to describe the actions of central bankers and their outlook for interest. There are a few examples below:

Hawkish:–

Central bank’s bias toward increasing interest rates due to the country’s economy growing too fast or inflation rising or the need to hike the value of domestic currency etc. Remember these all economic indicators are linked to each other by the way.

Dovish:–

Central bank’s bias towards cutting interest rates due to the concern that the economy is slowing down too fast or deflation is rising or the need to decrease the value of domestic currency etc.

Central Bank Intervention:–

Action taken by central banks to induce movement in currency rates is known as central bank intervention. For export-driven countries, their central banks will intervene more often to keep exports competitive.

Now I discuss below several central banks in the world which is much effective for the Forex market:

U.S Federal Reserve (Fed):–

Currency: USD

The federal reserve, in short, the Fed is the central bank of the united states. The FOMC (Federal Open Market Committee) Fed funds rate should be taken note of, especially for traders who are trading the USD pairs. FOMC comprises 12 members and has the right to determine the interest rate of the USA.

The Fed’s key mandate is to ensure maximum employment and maintain inflation rates at 2% and maintain economic growth at a desirable rate. The Fed is also responsible determine the reserve ratio required to be held by banks. The Fed is closely monitored by traders since the USD is the main reserve currency in the world.

Bank of Japan (BOJ):–

Currency: JPY

The Bank of Japan is responsible for ensuring the financial stability of the Japanese economy and the policy board is responsible for setting interest rates.

Since Japan is an export-driven country, it is against the Bank of Japan’s interest for the Yen to strengthen too much. Hence, intervention by BOJ is more often compared to the other central banks to prevent the yen from becoming too expensive.

European central bank (ECB):–

Currency: EUR

The ECB is the central bank of the 19 members of the European Union countries. This central bank’s mandate is to maintain a stable inflation rate of 2% and ensure currency stability.

You need to take note of the monetary policy decisions made by the bank governing council, which is responsible for set refinancing operation rates, marginal lending facility rates, and deposit facility rates.

Swiss National Bank (SNB):–

Currency; CHF

Switzerland’s central bank is responsible for the CHF, and it mandates it to maintain economic growth and price stability and inflation rates to 2%. The 3-month LIBOR market is used to determine interest rates.

The SNB also oversees the financial market infrastructures as a strategy to promote financial stability.

These are just a few examples of central banks and their roles in the Forex market. Other central banks, such as the Bank of Canada (BOC), Bank of England (BOE), the Reserve Bank of New Zealand (RBNZ), and Reserve Bank of Australia (RBA,) also play significant roles in their respective economies and impact their respective currencies in the Forex market. Hence you also need to focus on other central banks’ activity too.

I hope this article is helpful for you to understand Worldwide Central Banks and their roles.

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In most currency pairs, a pip is represented by the fourth decimal place, except for the Japanese yen (JPY) pairs, where it is represented by the second decimal place. For instance, if the GBP/USD currency pair moves from 1.2301 to 1.2306, it has moved 5 pips. And in the context of the JPY pair if the USD/JPY moves from 143.70 to 143.75 it has moved 5 pips. The fifth decimal place is known as pipet and it is generally not considered for calculation.

To calculate the monetary value of a pip, you need to consider the lot size of the trade. Lot sizes can vary according to you. You will learn about Lot size right next.

It’s important to note that different Forex brokers may have variations in how they calculate pip values, so it’s always advisable to check with your specific broker or trading platform to ensure accuracy in your calculations.

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Spreads in currency pairs refer to the difference between the bid price and the ask price of a currency pair in the Forex market. The spread is typically quoted in pips (You will learn about pips right next). It is essentially the cost that traders incur when executing a trade. The spread exists because Forex brokers need to make a profit, and it serves as their compensation for facilitating trades.

As your know Currency pairs are quoted in two prices: the bid price and the ask price. The bid price is lower than the ask price, and the difference between them is the spread. For instance, if the bid price for the GBP/USD currency pair is 1.3089 and the asking price is 1.3091, the spread would be 2 pips.

Spreads can be categorized into two types: fixed spreads and variable spreads. Fixed spreads remain constant regardless of market conditions. On the other hand, variable spreads fluctuate depending on market volatility and liquidity. Variable spreads tend to widen during periods of high market volatility or low liquidity.

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For Example: In the GBP/USD currency pair the GBP (Great Britain Pound) is the base currency and USD(US Dollar) is the Quote Currency

The exchange rate indicates how much of the quoted currency is required to buy one unit of the base currency.  They provide opportunities for buying or selling one currency in exchange for another with the expectation of profiting from changes in their relative values.

For Example, If the exchange rate of GBP/USD is 1.2736, it means that 1 pound (GBP) can be exchanged for 1.2736 US dollars (USD).

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