Know the Eight Major Central Banks
Performing fundamental analysis becomes important for retail traders to do. Especially data related to interest rates. Because one factor that can definitely move the currency market is the interest rate. Interest rates are the reason for global investors to divert money from one country to another to seek the highest and safest returns. Most retail traders do not know that the absolute value of the interest rate is not that important. But expectations of future interest rates are important to note.
Retail traders must familiarize themselves with what makes the central bank change its policy when it comes to predicting the next step and like the future direction of a particular currency pair.
The Federal Reserve (Federal Reserve)
The Federal Reserve is the most influential central bank in the world. The US dollar is always on the other side about 90% of all currency transactions. The volatility of the Fed has had a major impact on most other currency movements.
The Fed board that decided interest rates is incorporated in the Federal Open Market Committee (FOMC), which consists of seven Federal Reserve Board governors plus five presidents from 12 branches of the Reserve Bank.
The Fed is in charge of long-term price stability and sustainable growth. The Fed is also scheduled to hold eight meetings a year related to its monetary policy decision.
The European Central Bank (ECB)
The European Central Bank was established in 1999. The ECB Board is a group of members that decide changes to monetary policy. The ECB board is comprised of six members of the ECB executive board, plus the governors of all the national central banks of the twelve eurozone countries.
The ECB is always cautious in making changes to its interest rate policy. In general, the ECB will provide sufficient warning to the market through press conferences.
The task of the ECB is to maintain price stability and sustainable growth. But unlike the Fed, the ECB seeks to maintain annual growth in consumer prices below 2%.
The Euro zone and other European regions, as its economy depends on exports, the ECB also has an interest in preventing excessive strengthening in its currency as this is a risk to its export market.
The ECB Council meets in two weeks, but policy decisions are generally made only at meetings where there is an accompanying press conference, and it happens 11 times a year.
The Bank of England (BoE)
The Bank of England’s monetary policy committee (MPC) is a nine-member committee composed of a governor, two vice-governors, two executive directors and four outside experts. The BoE, under the leadership of Mervyn King, is often cited as one of the most effective central banks. The BoE is currently led by Mark Carney.
The BoE’s duty is also to maintain monetary and financial stability. BoE’s monetary policy mandate is to keep prices stable and maintain confidence in the currency. The central bank is targeting inflation at 2%. If prices break the level, the central bank will look to control inflation, while a level below 2% will encourage the central bank to take action to boost inflation.
BoE is scheduled to meet once a month.
The Central Bank of Japan (BoJ)
The Bank of Japan’s monetary policy committee consists of the governors of the BoJ, two vice-governors and six other members. Because Japan is heavily dependent on exports, the BoJ has a more active interest than the ECB in preventing overly strong currencies.
Japan’s central bank has been known to always enter the open market to artificially intervene to weaken its currency by releasing the yen into the market or selling the yen against the US dollar and euro. BoJ is also very vocal when worried about the excess volatility in the market and the strengthening of its currency.
The task of Japan’s central bank is to maintain price stability and ensure the stability of the financial system, which makes inflation the central bank’s central focus.
The BoJ is scheduled to hold a policy meeting or meeting once a month or twice.
Swiss National Bank (SNB)
The Swiss National Bank has a three-person committee that makes decisions on interest rates. Unlike most other central banks, SNB determines the range of interest rates rather than a certain target rate. Like Japan and the euro zone, Switzerland is also highly export dependent, meaning the SNB is also not interested in seeing its currency get too strong.
The SNB is tasked with ensuring price stability when taking into account the economic situation and is scheduled to conduct a three-month policy meeting.
Bank of Canada (BoC)
The Bank of Canada’s monetary policy decision was made with a consensus decision by the Governing Council, which consists of the governor of the Bank of Canada, senior deputy governor and four deputy governors.
The Canadian Central Bank is responsible for maintaining the integrity and value of the currency. The central bank has a 1-3% inflation target, and has done a good job of keeping inflation within a certain range since 1998.
BoC is scheduled to conduct policy meetings up to eight times a year.
Reserve Bank of Australia (RBA)
The Reserve Bank of Australia’s monetary policy committee consists of central bank governors, deputy governors, secretaries of treasurers and six independent members appointed by the government.
The RBA is in charge of ensuring currency stability, employment maintenance, economic health and well-being of the people of Australia. The central bank targets 2-3% inflation per year.
The RBA is scheduled to conduct policy meetings up to eleven times a year and usually on the first Tuesday of each month.
Reserve Bank of New Zealand (RBNZ)
Unlike other central banks, the RBNZ in decision making on monetary policy ultimately lies with the central bank governor.
RBNZ is in charge of maintaining price stability and to avoid instability of output, interest rates and exchange rates. RBNZ has an inflation target of 1.5% and focuses on targets, because failure to achieve it could result in the dismissal of the RBNZ governor.
The RBNZ is scheduled to conduct policy meetings up to eight times a year.
Well, once you know more about the central bank, its duties and decision-makers in each of the major central banks, you can better predict central bank movements.
For many central banks, the inflation target is key. If inflation, which is generally measured by the Consumer Price Index (CPI), is above the central bank’s target, then you know that it will have an effect on tighter monetary policy. In the same way, if inflation is well below target, the central bank will look for ways to loosen monetary policy.
Combining the relative monetary policy of the two central banks is a great way to predict where the currency pair moves. If one central bank raises the interest rate while another grips the status quo, the currency pair is expected to move toward the interest rate differential (except for unforeseen circumstances).