Central bank

Central bank

What is a central bank?

A central bank is an institution responsible for supervising the monetary system of a nation or a group of nations. Their usual duties are to issue currency, regulate the money supply and control interest rates.

Their decisions affect the financial markets in general and the currency markets in particular. Sometimes, they also supervise the commercial banking system in their country.

Some of the most important central banks are:

Trading and central banks

Monitoring announcements and actions of central banks is key when you employ fundamental analysis.

Central banks are key drivers behind the movement in the currency markets because they are managing the money supply. An excess money supply can lead to inflation and a devalued currency.

If, however, inflation levels are too high, a central bank may adopt a restrictive monetary policy. If the Bank of England were to limit the money supply, for example, it would increase the value of British pound. This could have an impact on currency pairs containing the pound, such as the price of the GBP/USD increasing.

News releases and reports on a central bank's decisions can create high volatility in the currency markets, especially if there is a difference in the actual result and the expected result.

Discuss fundamental developments in the economy in our forum:

If you are a forex trader, we recommend to read more about the impact of fundamentals on currencies:

Module
Fundamental factors, such as the interest rate and inflation, influence currency markets. Understand how they help every forex trader.

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