Monetary policy is determined by a country’s central bank acting independent from government. The process of drafting, announcing & Implementing the plan of actions taken by the Central Bank of a Country that controls the quantity of money in an Economy. Monetary policy involves money supply and interest rates, aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth and liquidity.

• Money supply and Interest rates
• Controlling inflation and consumption
• Economy Growth
• liquidity

Now we have learned about what monetary policy is, let’s go one step further. Have you ever heard monetary policy referred to as being Hawkish or Dovish? Pretty often, when reporting monetary policy releases, the media announces whether a central bank is adopting a “hawkish” or a “dovish” policy.

Central Bank monetary policies tend to affect the value of the currency in the Forex market. A hawkish monetary policy stance often results in the appreciation of a currency, while a dovish announcement will tend to have the opposite effect. The actions of the central banks determine the value of a particular currency and make it easier to predict the movements on the forex market. So it is important to keeps updated on monetary policy decision for Forex traders.

This article will clarify these concepts, and also explain better  role of central banks in the Forex market. The better you as a trader understand this role and the effect of monetary policy, the better you can utilize basic fundamental analysis to trade Forex more profitably.

Role of Central Banks

The purpose of such open market operations is to steer short-term interest rates, which in turn influence longer-term rates and overall economic activity.

Generally, in this context a central bank will pay most attention to setting the rate of interest, depending on its assessment of the current state of the economy as well as its forecasts. This assessment is key because it can tilt the balance towards a policy emphasizing increasing employment and economic growth, and policies whose main purpose is keeping inflation under control at a relatively low level.

Currencies tend to move the most when central bankers shift tones from dovish to hawkish or vice versa. For example, if a central banker was recently dovish, stating that the economy still requires stimulus and then, in a later speech, stated that they have seen inflation pressures rising and strong economic growth, you could see the currency appreciate against other currencies.

Conclusion:

Forex traders can profitably increase their trading discrepancies by monitoring the central banks’ policies governing the currencies they trade in and trading accordingly. The increasing or decreasing of the interest rates has many consequences on the Forex markets. So, currency traders and investors pay close attention to the information that the central banks announce periodically.

In a country where the central bank decisions are hawkish, investors will start placing their money in the currency of that country, so they can benefit from the high-interest rates that it offers. Hawkish doesn’t mean that the currency will strengthen immediately, but it is a sign that the possibilities are high that it will, so it is assumed to be a safe bet.

In a country where the central bank is dovish, Forex traders will be selling the currency of that country as they will expect its value to decline. International trade will also be affected as the costs of goods and services from this country will decrease at a global level, which leads to more demand from abroad. However, It is essential to pay attention to how low interest rates go because if they are still higher than other countries, it probably will mean that there won’t be so significant changes in the value of that currency.