Trading is all about interest rates and interest rate policies and therefore knowing what to expect from a central bank is the key to successful trading.
Major economies are being “governed” by major central bank policies and here at, we will take each and every major central bank and discuss in detail what to look for when trading that specific currency and how to interpret what a central bank is doing.
The biggest and the most important central bank in the world is the Federal Reserve of the United States. Its position is given not only because the U.S. economy is the biggest one in the world, but also because the U.S. dollar is the world’s reserve currency and worldwide transactions are being cleared in dollars, no matter the financial center (London, Hong Kong, Tokyo or New York).
The dollar has a crucial role in the overall global financial system and only, for this reason, is it vital to know its fate or at least to have an educated guess about where it might go. In order to do that, besides technical analysis, one has to pay close attention to fundamental analysis, namely what the central bank is going to do with the overall monetary policy.
The Federal Reserve of the United States (Fed) has a dual mandate, and that is to create jobs and to keep inflation below or close to two percent. This means the interest rate will be moved and the monetary policy will be set taking into account both job creation and inflation.
Having said that, jobs data in the United States suddenly becomes extremely important and here are the things to watch on a monthly/weekly basis:
– NFP (Non-Farm Payrolls). This is the most important piece of economic data released in the United States and the entire world is watching. It is released on the first Friday of every month and at the same time, the unemployment rate comes out as well. It is not mandatory for the unemployment rate to fall if NFP is bigger than expectations, but usually, they move hand in hand.
– Initial jobless claims and continuing claims. These are being released on a weekly basis, every Thursday, and while some consider the data as lagging, it is, in fact, a very powerful piece of information especially if one can see a longer term trend developing. As a rule of thumb, the lower these numbers are, the better they are for the economy.
– ADP payrolls are released two days before the NFP and these represent the jobs created by the private companies in the United States. While most of the time the two are correlated, it is not mandatory for this to happen.
– ISM Non-Manufacturing. The ISM stands for Institute of Supply Management and it is being released on a monthly basis. A trader must look at the employment component in this release as it is gives an idea about how the NFP number will be.
– Labor participation rate. This can be seen on the detailed NFP data, and the bigger the number, the stronger the jobs data is as it gives credibility to the overall NFP number and unemployment rate.
The above are economic data releases that Fed members are watching closely before deciding on future interest rate policy but they refer only half of the Fed’s mandate.
The other part of the mandate concerns inflation and there are two sides of it; inflation on the consumer side (CPI – Consumer Price Index) and on the producer’s side (PPI – Producers Price Index). Both are equally important as it is being said that if PPI is rising, it is only a matter of time before CPI will rise, as producers will pass higher prices to consumers.
Both CPI and PPI are released on a monthly basis and as a rule of thumb, higher inflation is bullish for a currency while lower inflation is bearish.
The CPI is also compared YoY (yearly basis) and this offers a better understanding of the overall trend in inflationary or deflationary prices.
It is important to note here that the Fed is taking into account the Core CPI, or the CPI without energy, food and transportation price as they are considered too volatile and distort prices. Therefore, attention to details is needed before interpreting the CPI release as the overall CPI number may move in one direction while the Core CPI, the actual number that matter to the Fed may move in another direction.
Fulfilling these two mandates should translate to price stability. The second part, dedicated to the Federal Reserve, will deal with the way the bank chooses to communicate its intentions and what events to be closely watched and why.
Part 2
As mentioned in the first part, this is the most powerful central bank in the world, since it deals with the world’s reserve currency and sets the monetary policy for the world’s biggest economy.
The whole global economy is influenced by the monetary policy in the United States due to the global role of the US dollar, and this is what makes the Fed and its actions unique in the trading world.
The Federal Reserve is a central bank that governs on other smaller central banks in the United States, like the Federal Reserve of New York or the Atlanta Fed. Each and every regional bank has a member in the governing body of the Federal Reserve, the FOMC (Federal Open Market Committee).
The FOMC is meeting on a regular basis to assess the state of the US economy and to set the interest rate on the currency for the period ahead. During these meetings, the economy is analyzed and a vote is cast on what to do with the rates; keeping them as they are, hiking them or cutting.
The FOMC is meeting every six weeks and the outcome of the meeting is released on a Wednesday after the London session closes and a few hours into the North American session.
A document is released, named the FOMC Statement and that is where it is mentioned what the Fed did with the rates as well as explaining the overall view on future moves as well as over the US economy.
Markets move aggressively when the FOMC Statement is released as trading algorithms are instructed to buy or sell based on specific words/keywords/phrases the new statement may contain when compared with the previous one.
Lately, specifically in the last few years, the Fed introduced the concept of forward guidance. The idea of this principle is to offer the market an overall view of each and every member’s projection of the US economy and to see how they forecast the rates in the years ahead.
Moreover, a press conference is being held thirty minutes after the FOMC Statement is released where the Chairman/Chairwoman reads the FOMC Statement and then press representatives are asking questions.
Such times are extremely volatile as each and every word is scrutinized by the market and huge swings happen within the forex market.
It is worth mentioning here that not every FOMC meeting is followed by a press conference, but every other second meeting and sometimes even the third one. This makes FOMC meetings that are not followed by a press conference less important as, so far until now, the Fed didn’t move on rates if the move was not followed by a press conference.
Between the two FOMC meetings, right in the middle, the FOMC Minutes are released as well. This is another document released exactly at the same moment of time on the third Wednesday after the FOMC meeting and shows what the discussions during the meeting were, what the voting was, how many hawks or doves, and again the market is trying to anticipate the next move on rates.
The idea of the minutes is to offer market participants a clue about the Fed’s view of the overall economy in order for it not to be surprised at the next FOMC meeting and this way financial shocks will be avoided.
However, the communication process doesn’t stop here.
Between the two FOMC meetings and minutes, Fed members are scheduled to speak at various financial conferences or appear in public on TV holding interviews. The idea here is to make sure the market understood correctly the message the Fed tried to communicate and if not, these Fed members will make sure they are reinforcing the right message.
It is not only once when the market rallied or tanked on a Fed member’s speech as surprises are happening regularly.
Unfortunately, these speeches are quite often and they tend to lose importance over time. However, the economic calendar marks these events as important ones due to the fact that the US dollar is going to be influenced.
With this second part, we covered everything there is to know about the Federal Reserve of the United States and its importance in the forex market. Next article will be dedicated to the other major central bank in the world, the ECB (European Central Bank) as it is governing over an important economic area and it is facing challenges on a daily basis.


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