November 30, 2022

Central Bank: Their role in the Forex Market

LQDFX term of the day: Central Bank: Their role in the Forex Market

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Central Bank is a monopolized institution, administered by a national government. Moreover, this institution regulates the behavior of its member banks and formulates monetary policy.

A central bank is responsible for:

  • the production and distribution of money and credit,
  • issuing a nation’s currency, controlling its supply and in some cases,
  • acting as a lender, it provides emergency financing to the nation’s banking system.

What is the role of a Central Bank in the Forex Market?

Central banks play a great role in the currency market as they maintain financial stability and regulate national currencies. One of their main duties is to set lending rates within their area of responsibility, as well as monetary policy. Both interest rates and monetary policy are key factors affecting the Forex Market. Therefore, a Forex trader shall pay attention to upcoming economic releases and speeches from Central Banks.

Which are the major Central Banks? 

FED: The Federal Reserve System is the central bank of the United States. FED is responsible for USA’s monetary policy, i.e. to promote effectively the goals of maximum employment, stable price, and moderate long-term interest rate. It is also responsible for the financial system stability and the promotion of safety and soundness of individual financial institutions.
Safety and efficiency of payment/settlement system and promotion of consumer protection and community development are also among its main duties.

BoE: The Bank of England is the UK central bank. Most modern central banks based on BoE for their establishment. The Bank is one of eight banks with authority to issue banknotes in the UK. Furthermore, the Bank’s Monetary Policy Committee has the delegated responsibility of managing monetary policy.

ECB: The European Central Bank is the central bank of the 19 EU countries which have adopted the euro. It is an official EU institution with main task to maintain price stability in the euro area. Further, its tasks include the definition and implementation of monetary policy for the euro area and banking supervision.

SNB: The Swiss National Bank is responsible for Switzerland’s monetary policy as an independent central bank. Its main goal is to maintain price stability, while taking account of economic developments. Thus, SNB should create an appropriate environment for economic growth.

BOJ: The Bank of Japan is a legal person established under the Bank of Japan Act. The Policy Board is the Bank’s highest decision-making body. It determines the guideline for currency and monetary control and sets the basic principles for carrying out the Bank’s operations.

BOC: The Bank of Canada’s role is “to promote the economic and financial welfare of Canada”. The Bank’s four areas of responsibility are: Monetary policy, Financial system, Currency, and Funds management.

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Did you know that Swiss National Bank, knowing for being fiercely independent, is not owned by the Swiss Federal Government?

Swiss cantons (45%), the cantonal banks (15%), and private individuals (40%) own the Swiss National Bank. (Last Data as of 2015)

Sources: Investopedia, Investing.com, Wikipedia, Central Banks websites