Worldwide, central banks are tasked with the responsibility of fixing the price of the native currency. This is the exchange rate traded in the forex market. The central banks do so by passing monetary policies that influence trader’s sentiments about an economy, likewise strength of the underlying currency.
Central bank’s actions and policies influence price action in the trillion-dollar forex market. The open market operations and interest rates passed by some of the biggest central banks affect currency rates largely.
Despite being a $6 trillion marketplace, the forex market is influenced immensely by the monetary policies of some of the biggest central banks in the world. The biggest central banks in the world represent the biggest economies in the world whose currencies boast high liquidity levels in the market.
Likewise, the most influential central banks in the forex market are
The U.S Federal Reserve System
It is the most influential central bank in the world by virtue of being the custodian of the world reserve currency in the dollar. The U.S dollar accounts for more than 90% of all currency transactions that take place in the currency markets.
Similarly, any action taken by the FED, as it is commonly referred to, influences traders’ sentiments about the U.S economy, conversely affecting the U.S dollar sentiments and strength. The FED determines monetary policies such as interest rate hikes and cuts. It also influences money supply in the economy through bond buying and selling that affects dollar strength in the market.
The European Central Bank (ECB)
Established in 1999, the European Central Bank is arguably the second most powerful and followed central bank in the forex market. The central bank is tasked with stabilizing the European Union economy and consists of six executive board members.
Like the FED, the ECB carries out monetary policies that influence the European Union economy, conversely, the Euro, billed as the second most powerful and sought after currency. The ECB also addresses domestic economic problems by changing the quantity of euros in supply and interest rates that influence the euro strength in the market.
Given the EU economy is export-dependent, the EU strives to prevent excess strength in its currency as it can have severe repercussions for the export market.
The ECB policy measures influence the Euro strength against the majors more so the EUR/SUSD, which is the most traded currency pair in the forex market.
Bank of England (BOE)
Now that the U.K has exited the European Union, the Bank of England is poised to affirm its status as one of the most powerful central banks in the world. This is partly because it is the British Pound custodian, one of the most liquid and traded currency in the forex market.
It is one of the most effective central banks given the British pound’s stability and high liquidity in the forex market. The bank’s main monetary policy is to keep prices stable and maintain confidence in the GBP.
The BOE’s monetary policies influence traders’ sentiments on the British pound, conversely affecting currency rates in the GBP/USD and EUR/GBP, which are some of the most traded currency pairs in the currency markets.
Bank of Japan (BOJ)
Japan is home to one of the biggest economies in the world, backed by a strong manufacturing industry. Similarly, the Japanese Yen is one of the most traded currencies in the forex market, given the elevated liquidity, it comes with.
The Yen fluctuates in the currency market based on the monetary policies initiated by the BOJ to stabilize the export-dependent economy. Likewise, the central bank’s sole role is to prevent an excessively strong Yen from hurting the export-dependent economy.
Swiss National Bank (SNB)
Swiss National Bank is one of the most powerful central banks in part because it is the custodian of the Swiss Francs, one of the most traded currencies in the forex market. As a major currency, CHF sentiments are significantly influenced by any monetary policies passed by the SNB.
The SNB is known to be highly conservative with interest rate, highly needed, to weaken the CHF and offer support to the export-dependent economy.
Bank of Canada (BOC)
Canada is home to the Canadian dollar, one of the major currencies in the forex market. Similarly, the actions taken by the Bank of Canada influences trader’s sentiments on the economy, similarly the CAD strength in the market.
The bank is governed by a three-person committee tasked with making critical interest rate decisions that influences CAD strength. Being an export-dependent economy, the weakness of the CAD is of great importance to the BOC.
Reserve Bank of New Zealand RBNZ
The Reserve Bank of New Zealand is another influential central bank in the world tasked with making crucial decisions that influences the New Zealand economy, likewise the New Zealand dollar. The bank focuses on maintaining price stability and avoiding instability in output, interest rates, and exchange rates.
Reserve Bank of Australia RBA
The Reserve Bank of Australia is tasked with ensuring the stability of Australia’s economy as well as the Australian dollar. The bank has an inflation target of between 2-3% and carries out interest rate hikes and cuts that influences how the AUD trades in the currency market.
FAQs
What is a central bank?
A central bank, also called as reserve bank or money authority in some countries or a group of countries is a public financial institution that controls and manages the production and distribution of money supply in the financial system
What are the main functions of central bank?
- Setting of monetary policy – Interest rates, Quantitative Easing and Exchange rate intervention
- Ensuring financial stability of the country or group of countries
- Issuing notes or paper currency to the public
- Manage and control the foreign exchange reserves
- Lender of last resort to commercial banks
- Lender of last resort to government
What is central bank intervention?
Central banks enters foreign exchange market to buy or sell currency with the aim of stabilising the exchange rate.
What is the differene between central banks and commercial banks?
Central banks serve the country’s or regional banking system. They act as a bank to the member banks and the government with the aim of ensuring stability in the financial system by enforcing controls and regulations in the banking system whereas commercial banks operate under direct control and supervision of the central banks to serve individuals and businesses with the aim to make a profit from the financial services they offer.
