Foreign exchange rate

A variety of factors influences the forex market.  This is why it is difficult to predict long term or short term movements in the market. Among the plethora of factors that influence this market, we are going to look at the foreign exchange rate.

How foreign exchange rate decisions affect the market

The foreign exchange rate is the rate at which a currency can be exchanged for another. This rate is set by either the central bank of the respective countries or forces of supply and demand. When the rates are at the mercy of supply and demand, it has very little influence in forex trading, but when the central banks fix the rates, it heavily affects the forex market.

For example, certain central banks could set out with monetary policies that will weaken their currency against other major currencies for exportation purposes. When this happens, it can change the dominant trend for all pairs that have the said currency as either a counter currency or a base currency.

The most prominent example of how central banks can influence foreign exchange rates is the Swiss Central Bank (SNB) tampering of 2015.

When to watch out for foreign exchange rates decisions

The different central banks meet at various times to make these decisions. Some of them meet monthly while others meet quarterly. To know when to watch out for these decisions, use websites dedicated to fundamental analysis as they always list these events at least one week before the due date. In this way, you will be prepared beforehand.

What to do on exchange rates decision days

On the days appointed for these decisions, you can either stay off the markets or try to benefit from the decision as soon as it is made.  To benefit from the decision immediately it is made, the trader can either take a trade in the direction of the market surge in response to the release or setup pending orders that will get filled in with the market as it breaks upwards or downwards in response to the news.  In doing this, however, you risk slippage that could be as high as 50pips in some instances.

Any approach you choose to go with for trading on foreign exchange rate decision days needs to be adequately tested on a demo account before you put your money at risk.

For some traders, staying away from the market at these times is the best thing to do. The effects of an exchange rates decision are always long lasting so it could be safer to stay out of the market at these times and join the trend when the market has digested the decision and is calm.

 Websites to use when looking out for interest rate decisions are forexfactory.com and fxstreet.com. These two are the major ones as they are a comprehensive forex calendar that shows traders time and date of critical fundamental releases.

Image credit: blog.dol.gov