Forex Trading When Central Bankers Hold Speeches
As an integrated part of the forward guiding process, the way a central bank decides to communicate with markets is depending on various factors. Central bank speeches are part of this communication process and they differ from one central bank’s jurisdiction to another. Speeches that influence markets are not only the ones held by Presidents or Governors of a central bank. Other representative members in the overall governing body of a central bank are holding regular press conferences, or participate in events where they talk about the state of the economy. Markets are listening and reacting, with the retail traders following what the algorithmic trading, or high-frequency trading, or quant trading is doing. This is the reality of this century: humans follow robot, at least when it comes to trading in general and to Forex trading in particular.
Types of Speeches
A speech is considered when a central banker is stating his/her point of view regarding the monetary policy, or answers questions in a debate panel, etc. From this point of view, there are different types of speeches central bankers hold and they are all equally important. Newspapers interviews, TV interviews, etc., fall into the same category when it comes to fundamental news from a central bank that is influencing the way the market is moving. Below are the most important types of speeches one can expect when trading the Forex markets.
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Speeches Held by Central Bank’s Heads
These are, by far, the most important ones, and the ones that make Forex markets tremble. Forex traders are focusing on these speeches and most of the times the whole forex dashboard is just staying in tight ranges until the central banker starts the speech. From that moment on, the hell breaks loose, in the sense that violent reactions are expected because algorithmic trading is always making the first move. Only after the dust is settling a big, trading is recommended to start for the retail traders. Central bank’s heads speeches that have the tendency to influence the whole Forex dashboard, are, in the order of their importance, the following:
- Speeches held by the head of the Federal Reserve of the United States (Fed). The Fed is the most important central bank in the world as it is setting the monetary policy for the U.S. dollar, which, in turn, is the world’s reserve currency.
- Speeches held by the head of the European Central Bank (ECB). The ECB President is holding regular speeches in front of the press representatives as well as in front of the European Parliament, and the whole market is influenced.
- Speeches held by other important central bank’s leaders: Bank of England Governor, Swiss National Bank President, Bank of Japan’s Governor, Reserve Bank of Australia’s, and Reserve Bank of New Zealand’s Governors.
The central banks mentioned above are only the most important ones, but any currency pair you might trade is influenced by the central bank’s leader that it represents it. Therefore, knowing when these speeches are to be expected is key to the overall positioning.
Speeches Held by Other Members of a Central Bank
Central banks are being organized in such a way that the interest rate decisions and the monetary policy, in general, are being taken by consensus. When the central bank is meeting every month or every six weeks, like it is the case for the most important ones, the governing body is taking two days to analyze the economy. This means that, for those two days, central bank members are looking over the last economic indicators that were released since the last meeting, they analyze them, and see what changed. If anything changed, they will react through new monetary policy tools. The governing bodies of a central bank have different names depending on the jurisdiction, but essentially, they are doing the same thing. As such, in the United States it is called the FOMC (Federal Open Market Committee), in the European Union it is called the Governing Council, in the United Kingdom we’re dealing with the MPC (Monetary Policy Committee), and the list can go on. The role of the other members of a central bank, basically the members that are being part of these governing bodies is much more extended than the description stated above. Their part is also to make sure the market understands the statement the central bank is issuing. To do that, between central bank meetings, members of the governing bodies are participating in all kind of interviews, speeches, conferences, etc., with the purpose of reinforcing the monetary policy stance. It so happens that sometimes markets are going ahead of themselves, at least when it comes to the way they react to the monetary policy statements. If this is the case, these central bankers will talk they market the other way. To give you an example, let’s assume the Fed is hiking the rates and the U.S. dollar is bought as a consequence. If the move is much more aggressive than it was forecasted by the central bank’s projections, then the Fed members will have mentioned something dovish in their next speeches. It could be that they are going to state that the current economic momentum is temporary and not expected to stay, or that the monetary policy is still being viewed as a flexible tool, or, if nothing works, they will simply use blunt language. However, there’s a catch to whatever a central banker is saying! The catch is that these guys must use a special language when addressing the economic situation. One cannot bluntly say that the central bank is selling a specific currency, or something along these lines because this would create disruptions in the way the financial markets function. Keep in mind that not only the Forex market is influenced by a central bank’s decision, but the stock market as well, not to mention the bond one and the regular options markets. In earnest, all markets are interconnected and the reaction from an unprepared speech may have a domino effect over the overall trading arena and on the global economy as well. Therefore, central banker’s speeches are so important and why market participants are looking at them with such an interest. Moving forward, we’ll discuss what a risk-off and the risk-on trading environment are and how traders can profit from knowing these trading situations can occur.
Other educational materials
- The Importance of Press Conferences
- Risk-off vs. Risk-on Trading
- Macroeconomics in Forex Trading
- Forex Market Terminology
- Profit from Forex Trading Using Different Trading Styles
- How to Set Up an Expert Advisor
Recommended further readings
- “Central bankers and uncertainty.” Goodhart, Charles. Bank of England. Quarterly Bulletin 39, no. 1 (1999): 102.
- How do central banks talk? Blinder, A.S., 2001. . Centre for Economic Policy Research.