Fundamental analysis plays an important role in helping forex traders predict future price movements for the currency pairs they are trading, particularly in coming up with swing-trade setups. Central bank announcements and monetary policy statements usually determine the appreciation or depreciation of a currency as monetary policy officials decide on increasing or decreasing interest rates. They also decide on increasing or decreasing money supply in the economy. As a result, the interest rate and the level of liquidity affect the return and demand for the country's currency. With that, forex trading requires one to monitor economic releases, as these provide helpful clues for monetary policy.
Strong economic data reflects good economic performance, which can lead the central bank to hike interest rates or reduce the amount of cash circulating in the economy. In doing so, the lower supply of the currency in circulation boosts its value while the increase in interest rates translates to higher returns in holding the currency. All in all, these factors translate to an increase in demand for the currency, therefore increasing its value.
On the other side of the coin, poor economic figures mean that the economy isn't doing so well. This can lead the central bank to slash interest rates by a few basis points or flood the economy with extra cash. The increased money supply in the economy translates to a reduction in value of the currency, as dictated by the Law of Supply and Demand. The drop in interest rates reflects lower return on holding the currency, so there's weaker demand for the currency, leading it to depreciate.
This is why forex traders pay close attention to monetary policy announcements and actual central bank rate decisions. Aside from containing the decision on money supply and interest rates, policymakers also include their assessment and outlook for the economy. Central bank announcements are typically followed by a press conference, wherein the central bank governor usually talks about future monetary policy plans. As an example, some central bank heads can specify that their future monetary policy decision is hinged on the outcome of labor reports or inflation figures.
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.
Strong economic data reflects good economic performance, which can lead the central bank to hike interest rates or reduce the amount of cash circulating in the economy. In doing so, the lower supply of the currency in circulation boosts its value while the increase in interest rates translates to higher returns in holding the currency. All in all, these factors translate to an increase in demand for the currency, therefore increasing its value.
On the other side of the coin, poor economic figures mean that the economy isn't doing so well. This can lead the central bank to slash interest rates by a few basis points or flood the economy with extra cash. The increased money supply in the economy translates to a reduction in value of the currency, as dictated by the Law of Supply and Demand. The drop in interest rates reflects lower return on holding the currency, so there's weaker demand for the currency, leading it to depreciate.
This is why forex traders pay close attention to monetary policy announcements and actual central bank rate decisions. Aside from containing the decision on money supply and interest rates, policymakers also include their assessment and outlook for the economy. Central bank announcements are typically followed by a press conference, wherein the central bank governor usually talks about future monetary policy plans. As an example, some central bank heads can specify that their future monetary policy decision is hinged on the outcome of labor reports or inflation figures.
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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