Trading the Forex market places an unusual emphasis on Central Bank policy and rate announcements that isn’t as common in other markets albeit still very important. The effect that monetary policy has is paramount to currency outcomes and can be a major determinant in what trades you decide to place. Because monetary policy is the process by which a monetary authority like a central bank controls the supply of money within an economy in order to support economic goals.
Why is a Central Bank’s Monetary Policy Important for Forex Traders?
As a trader, it’s always important to recognize where a trade opportunity lies. One of the cleanest fundamental set-ups is when you have one central bank that is looking to tighten money supply due to an overheating economy which shows underlying strength and another economy’s central bank that is looking to loosen monetary policy which weakens the currency in order to jump start the economy.
On the other end, if you have two central banks with very similar monetary policy goals then the trade set-up may not be as clear.
This clear imbalance or disparity between to economies central bank policies makes this an important distinction for you to be aware of for trading purposes especially when price action aligns with the fundamental imbalance. The rest of this article will break down where central banks currently stand and what opportunities lie within the imbalances.
Where do Central Bank’s Monetary Policy Currently Stand?
Federal Reserve – US DOLLAR
Presented by FXCM’s Marketscope Charts
The big stories behind the US DOLLAR and their central bank are the changing of the guard where Janet Yellen will take over from Ben Bernanke as head of the Fed as well the eventual taper of current easing efforts. Since July of this year, the USDOLLAR has weakened significantly as the underlying measures of economic health like inflation and employment have not improved enough for the Fed to confidently begin tapering their easing efforts. Also of importance, Janet Yellen, the new head of the Federal Reserve starting in 2014 has asserted that she will continue to be accommodative and work not to begin tapering, which would be US Dollar positive, until the underlying economic indicators show continuance strength.
Bottom Line: The US Dollar may continue to trade lower and retest the price channel floor or possibly break it as The US Dollar remains comparatively weak to other major currencies.
Bank of England –GBP
Presented by FXCM’s Marketscope Charts
As of last week, the Monetary Policy Committee of the Bank of England have recently upgraded their forecasts of an economic recovery in their inflation report. A few weeks earlier, BoE governor, Mark Carney, mentioned that he would be looking for an improvement in key economic indicators before they looked to tighten their current monetary policy.
Bottom Line: The inflation report upgrade last week seemed to be the signal the market wanted as the GBP is now seemingly lead other economies out of the 2008 crisis which weakened many major currencies. A break of 1.6260 would be a key technical development for further GBP Strength.
European Central Bank – Euro
Presented by FXCM’s Marketscope Charts
The market was shocked two weeks ago when the ECB decided to cut their already historically low central bank reference rate to 0.25%. This move was on the back of a paltry inflation reading which showed current inflation, which is an elementary reading of economic demand was at lows not seen since after the 2008 credit crisis and 2010 Sovereign crisis when Greece came to the forefront. This cut of interest rates has many looking to the December meeting of the ECB to provide further clarity on how weak the Euro may become.
Bottom Line: The euro faces one of its most uncertain fates in the last 3 years. It appears the sole focus of the ECB on inflation will cause them to fight the foe of disinflation which could keep the Euro under pressure for months to come.
Source: http://dld.bz/cU8Wy
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