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Central Banks and Monetary Policy

Central Banks and Monetary Policy

Everyone on the market is looking for monetary policy reports, when central banks  are meeting, and what the outcome will be. That date always brings important volatility levels and quick money could be made or lost in a blink of an eye as markets are traveling extremely fast. All of the markets are influenced by Monetary Policy decisions as the interest rate established by the central banks moves equity, bonds, and currency markets in the same time.

Most important central banks to watch are

It is important to go to the economic calendar and see when the central banks for the most important economies are meeting. They have a different schedule and name for the meetings, but these events are marked with red in the economic calendar and that means they are extremely important.

 

Watching Monetary Policy Meetings

 

Federal Reserve – global monetary superpower

The biggest central bank in the world, the Federal Reserve in the United States is meeting every six weeks, on a Wednesday, and the US dollar is moving across the board on the release. If you are trading a binary option based on a currency pair that has the US dollar in it, then you should be aware that on that Wednesday extreme volatility levels will be reached.

 

European Central Bank – common currency area for 18 countries

The ECB (the European Central Bank) meets monthly and the Governing Council establishes the interest rate. The meeting takes place on the first Thursday of each month causing the Euro to dance all over the screen during meetings until the outcome is presented to the markets. In the meantime, both the ECB and BOE (Bank of England) are changing the ways they communicate to markets. Even the Fed is doing that, so let’s take them separately and see what changes were made and how we, as traders, should react.

When does the ECB meet?

First, the ECB is not meeting anymore on each and every Thursday, and not even on a monthly basis. The press conference and interest rate decisions are held on Wednesday now and instead of a monthly basis meeting we now have a six-week time frame.

Moreover, copying the US model, the ECB is supposed to release minutes from the previous meeting and the whole process is supposed to be part of a forward guiding principle that recently governs the activity of all central banks. Again, the most important thing to watch on an ECB day is not the actual interest rate decision but the press conference that follows, as it is the one that is usually a game changer.

Structure of ECB’s press conference

During the press conference, the first part is dedicated to reading the statement while the second one is dedicated to Q&A and you never know what questions are going to be asked, as well as what answers will be given. Usually, price action on the euro related pairs is quite impressive so when deciding to trade an option one should consider a bigger expiration date so that the option could avoid unexpected spikes.

Bank Of England – Home of the sterling

Things changed even more dramatically and even earlier with the smallest of the big central banks. The first Bank of England Governor that is not British (Mr. Carney is Canadian) has changed the way the bank is functioning and communicating. When the MPC (Monetary Policy Committee) meets on a monthly basis, there is no statement to be released if there is no change in the interest rate. This makes the event quite boring if nothing new happens. However, there are other channels to communicate to markets and one of them, just to give an example, is the Inflation Letter BOE’s Governor is supposed to present and central bank’s members, especially the Governor, are using this opportunity to communicate their intentions to markets.

FOMC Meetings Breed Volatility

As for the United States of America and the Federal Reserve, things changed by the time they introduced the forward guidance policy. Since Mrs. Yellen, the current Chairwoman, came to the helm of the Fed, things changed quite dramatically.

While the dates on which the Fed meets are still the same (every six weeks, on a Wednesday), there are some interest rate decisions and FOMC (Federal Open Market Committee) decisions that are not followed by a press conference. Usually, those are not really moving markets. However, whenever a press conference is due, volatility rises and prices become unpredictable. While minutes are still there, three weeks after the interest rate decision, now a trader has to choose between looking at the dots a Fed member is predicting and read between the lines of Yellen’s speech.

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