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Which Central Banks Will Shape the Forex Market in 2024?


May 7, 2024 ( Newswire) Events around interest rate decisions are among the most anticipated in foreign exchange (forex or FX). Ultimately, interest rates affect everyone, setting a country's economic tone. The forex market always reflects the best and worst-performing economies, with central banks playing a key role.

2024 is already shaping up to be an intriguing year. In this article, let's consider which of these entities may be the most influential.

The Role of Central Banks in The Forex Market

Central banks are responsible for monetary policies (mainly managing interest rates and the money supply) that drastically affect a country's currency. These banks always aim to curb inflation or stimulate the economy.

A rate hike usually causes inflation to fall as people spend less money due to higher borrowing costs and lower demand for products and services. Meanwhile, a drop in interest rates is necessary to boost the economy. More people spend money (partly due to the lower borrowing costs), increasing the demand for goods and services.

The central banks of most first-world countries announce interest rate developments around 8–12 times a year. They will hike, cut, or keep the interest rate the same as before.

The consensus is that a rate hike is bullish or positive for a currency, while a rate drop is bearish or negative. Of course, things are rarely so straightforward, given that other factors determine a currency's value relative to another.

Also, the expectations before the announcement can be more impactful than the actual interest rate release (a case of 'buy the rumor, sell the news'). For instance, if the forecasted action was for a rate hike, yet the central bank keeps the rate the same, this may weaken the currency instead of strengthening it.

Central banks have historically kept the same interest rates for long periods. However, any rare, noticeable changes become noteworthy events that significantly affect currency valuations.

Which Will Be The Most Influential Central Banks in 2024?

Experts generally regard the 'Big Four' central banks as the most prominent regardless of the year. Let's consider what is anticipated for each central bank in 2024.

Federal Reserve (Fed)

The Federal Reserve is the central bank behind the most traded currency: the U.S. dollar. It has kept the same interest rate at 5.5% since July 2023. Fed members have been hawkish (or favor rate hikes) since the COVID-19 pandemic when the rate was only 0.25%.

As expected, the central bank is keen on combating inflation. The latter figure peaked at 9.1% (now 3.5%) in June 2022, the highest it had been since the early 80s.

Most analysts expect the Fed to reduce the interest rate at least once in 2024. The U.S. dollar has been strong thus far, but a rate cut may lower its value against many other prominent currencies.

European Central Bank (ECB)

The ECB manages the second-most traded currency, the euro. This central bank has adopted a dovish stance (or favored rate cuts) since October 2008, dropping the interest rate to 0% by April 2016.

It maintained this figure until June 2022, when it switched to a hawkish outlook, causing a 4.5% surge. This shift demonstrates the central bank's desire to decrease inflation like the Fed. As with the latter, analysts speculate that the ECB may drop the interest rate at least once in 2024, potentially weakening the EUR-USD market.

Bank of England (BoE)

The Bank of England has followed a similar trajectory to the Fed and ECB in stabilizing inflation in recent years. After some time dropping interest rates, the central bank fueled an ascent at the start of 2022 from 0.1% to 5.25%.

Again, market participants are keen to know whether the BoE will decrease its interest rate this year. Given the identical monetary policies of each currency's respective central bank, traders and investors will look to navigate the 'tug of war' between the U.S. dollar, the euro, and the British pound.

Bank of Japan (BoJ)

Finally, there is the Bank of Japan, a central bank with an opposite monetary policy approach to the Fed, ECB, and BoE. The BoJ began dovish behavior in June 1991, when Japan's interest rate stood at 6%. This number dropped to 0% by 1999, remaining at this figure for 17 years until 2016.

The Bank of Japan adopted a unique negative interest rate policy at the start of the latter year (from -0.1%) until April 2024 — the interest rate now sits at 0.1%.

Experts have seen Japan's chronically low-interest rates as a failure to revive its once-prosperous economy. Thus, the Japanese yen is among the weakest currencies among the G20, experiencing multi-year downtrends.

Yet, the former offers a carry trading opportunity for international investors, swapping a high-yielding currency against the low-yielding yen to benefit from the positive interest rate differential.

Conclusion: The Forex Market Goes Beyond Central Banks

A handful of central banks bear the most significant prominence in forex, directly or indirectly influencing many other foreign currencies. While the Fed, European Central Bank, and Bank of England have related goals, the Bank of Japan has been steadfast in keeping a near-zero interest rate.

While central banks have a noticeable influence on forex, many other factors affect the world's largest traded market.

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