HomeWhat Role do Central Banks Play in the Forex Market?

What Role do Central Banks Play in the Forex Market?

Although the Forex Market has no central location, national banks still play an important role in influencing prices. As government agencies, Central Banks are responsible for

regulating their countries’ official currency with the aim of sustaining a strong and healthy economic environment. Therefore, the decisions made by central banks have an effect on a country’s balance of trade, inflation rate and economic growth which directly impacts their position in the Forex market.

Breaking Down the Banks’ Role in Forex

When trading the news, one will notice that many high-impact events involve central banks. This is because central bank announcements may have a short-term and long-term effect on currency price value. For example, banks determine lending rates which can help to stimulate the economy when decreased, or bring down inflation rates when increased.

Secondly, monetary policy is set by banks in order to define the actions that the bank will be taking to regulate its national currency supply, such as Quantitate Easing.

Central banks also hold currency reserves which can be used to pay debts if needed.

Furthermore, since the bank’s primary aim is to maintain a healthy economy, the actions

carried out by these institutions often lead to changes in currency exchange rates.

Knowing when these events are occurring can help you make trades more profitable. Be prepared to open positions with LonghornFX and benefit from high leverage and narrow spreads on all FX pairs at www.longhornfx.com.

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Devaluation, Interest Rates and the Forex Market

Devaluation is another important role that the banks play in the Forex market. This term refers to the deliberate attempt to reduce the value of their national currency for a variety of reasons, such as making exports cheaper in order to increase their desirability among foreign customers.

Central Banks are usually also responsible for setting interest rates which help determine how much foreign investment will flow into the country. Foreign investment helps create jobs, increase consumer spending and boost the country’s Gross Domestic Product.

Trading the News with LonghornFX

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