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Since January 2015, over 20 central banks have participated in changes to monetary policy with the majority being rate cuts - see for yourself at http://www.cbrates.com/decisions.htm. Summer 2015 will play host to additional central bank decisions with the US Federal Reserve and RBNZ as some of the more noteworthy. The US Fed is contemplating a raise in interest rates for the first time in six years while the RBNZ is contemplating a cut in interest rates after a period of tightening and increasing throughout 2014.

What does this all mean? As a trader, it means that frankly, we’re at the mercy of the central banks and their decision making. The topic of monetary policy is discussed regularly and an immediate rate cut or increase does not necessarily equate to an instant follow through in the Forex Market. Central banks usually create a tone in the market months before price begins to catch up with the big picture - typically this does not bode well for the patience or lack thereof for the shorter-term trader. Traders may feel duped into trading a news announcement where price does the opposite of what the news suggests. Traders may also try to trade in the direction of a central bank decision but be months behind the true power move that comes after one’s patience and capital has worn thin. 

The important component to actually trading and profiting from these macro market moves is to understand the underlying tone established in advance. This practice may actually require reading the scintillating literature of the central banks as they publish reports, press conferences, and statements monthly. It may seem dull and mundane, but if traders are looking for obvious keywords and phrases that reflect the bank’s stance on monetary policy and the economy, they are able to ascertain the potential guidance necessary to identify the bank’s long-term wishes and direction. In short, is the central bank optimistic (termed hawkish), on the economic outlook or is it sluggish (termed dovish), on the economy? Are they willing to cut interest rates or looking to increase rates? Whatever the stance may be, the tone and dialogue is usually consistent in the central bank releases and hints at the eventual movement of the markets.

Let’s put this idea into perspective. The European Central Bank’s (ECB) Mario Draghi was discussing restructuring the LTRO program, mentions QE, and consistently uses phrases like whatever it takes to save and preserve the euro. Rate cuts had taken place but the decline of the euro was not immediate (May 2013 cut from .75 to .50, November 2013 cut from .50 to .25). The EURUSD rally could not be stopped until an ECB Press Conference in May 2014 faked a move through 1.4000 (topping at 1.3992) and moved reversely to bearish for the remainder of the week and pretty much to present day. Rate cuts continued in June 2014 and September 2014 (.25 to .15 and .15 to .05 respectively) as the euro continued its rapid depreciation. 

While traders were watching Eurozone headlines of contagion (Greece default, Spain/Italy/Portugal in trouble), end of the euro, bailouts, etc. price action of the EURUSD was not entirely correlated until months later. Once the correlation matched up and the rubber hit the road so to speak, the selloff in the EURUSD was incredibly one-directional (Figure 3). Perhaps this was the perfect storm of institutions convinced that selling the euro and buying dollars was the best play and the selloff momentum substantially increased but today the talk of the EURUSD target is parity (1.00 exchange) while the current price is in the 1.0800 to 1.0900 area.

Central Bank, Season Heats Up, Understanding, Market Moves, Monetary Policies, fx trader, forex - EURUSD Price ActionFigure 3 - EURUSD price action behavior in the wake of ECB Monetary Policy

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