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Yes, central banks have a big influence when it comes to FOREX trading. Such influence is so substantial that manipulation is done all the time. It only makes sense then that FOREX traders carefully monitor the actions of the central banks of the world, particularly those that influence the seven major currency pairs, in order to profit or limit losses.

How the banks act and decide with regard to monetary policy will directly affect the world’s currencies. However, decisions and actions are usually done with different political and social reasons.

The Central Banks’ Monetary Policy

Monetary policy is referred to as the action taken by a country’s central bank to control the growth and size of money supply. To do this, the central bank can either increase or decrease the interest rates and/or adjust the reserve requirements. By doing this, the central bank is able to alter the purchasing power of money; and therefore, change the economic conditions.

The goal of the central bank may not include the manipulation of FOREX but their actions have direct impact to the currency exchange rates. Case in point, Reuters reported in March of 2014 that the released statement of the European Central Bank regarding its monetary policy and how it helped the stabilize the euro exchange rate.

How to Stimulate Economic Development Using FOREX

A strong example of economic development using FOREX took place in September of 2013 in Hungary. During that time, Hungary was having problems with foreign-currency mortgages. What the country’s central bank did was that it proposed to use FOREX reserves to resolve the problem. Swiss franc-dominated home mortgages were converted to the Hungarian currency. This strategy will help leverage the fluctuations in the currency market, which will improve the overall economic situation of the country.

What are the Risks for Retail Investors?

It must be kept in mind that the FOREX is a negotiated market, not a public market, which makes it vulnerable to changes. If traders don’t have the right strategies and market research when dealing with FOREX, then variable loss will likely be suffered.

Practice, constant exposure and seeking advice from skilled market traders will help mitigate the risk of losses. Remember to always keep a close watch on the actions of central banks, particularly their monetary policies, because they directly and indirectly influence the currency exchange rates.