Monetary Policies' Affect on Currency Trading

Monetary policy is the way in which the government manages monetary levels in the country.

The job for planning and executing monetary policy is usually given to a financial institution, such as the European Central bank for Europe or the Federal Reserve for the US. These institutions should be independent of government influence, and are usually central banks that are given the authority over monetary policy.

Monetary policy usually involves the raising or lowering of short term interest rates. These hold perhaps the utmost importance on currency trading prices. An example of an influence of monetary policy is when a certain central bank changes currency trading exchange rates with other major currencies. Even though monetary policy is different than fiscal policy, both of them influence one another immensely.

Types of Monetary Policy

Even though monetary policy is quite diverse and includes various actions, it all revolves around one basic factor, which is the modification of the base currency trading price. This activity of changing the liquidity of base currency trading is named open market operations.

Currency trading transactions are not only handled by investors of the Foreign currency market, and the majority of them are performed by the government authorities themselves. This fact is not known to all traders, even though it is of the highest importance.

The central bank is the major influencer of such factors as:

Short term interest rates
The currency trading exchange rate
The domestic price of spot market commodities such as gold

Central banks usually work with a different set of motives than traders, rather than trying to make a profit, they try to stabilize various economic factors. You should try and place the currency trading order according to the most recent decisions made by central banks, so you invest wisely and not count on luck working in your favor.

As a trader of the currency trading market, you should always keep that in mind. You do not need to learn specifically about each economic indicator, because this will only confuse you and make currency trading more difficult. Instead, read the following monetary policies and try to notice if they are reported as done on financial news.

Inflation targeting and price level targeting - Here the government tries to influence Interest rate on overnight debt, in an effort to change the CPI.
Monetary aggregates - An activity directed into increasing money supply, and change the CPI.
Fixed exchange rates - An effort to change currency trading price, and lower inflation.

You can get a lot of currency trading information by adhering to monetary policy, so try and stay updated with these factors so you can invest accordingly.

Posted by Richard Hollar