Central Bankers' Statements and Currency Prices

Political statements can have a significant impact on the currency market, and traders must be attentive to the market fluctuations that they entail.By following market analysis and an economic calendar, traders can detect potentials trading opportunities or risks. Let us look at some examples of how being attentive to the effect of statements on the markets could potentially make or break a trading plan.

Example 1: The Influence of the Fed’s Statement on EURUSD, October 29th, 2014

On October 29th, 2014, the Federal Reserve announced that interest rates could rise earlier than expected due to an improvement in the outlook for inflation. The central bank said that the “likelihood of inflation running persistently below 2.00%  has diminished somewhat” and added that “increases in the target range for the Federal Funds Rate [may] occur sooner than currently anticipated.”The chart below shows the influence of the Fed’s statement on EURUSD. Just before the statement, the currency pair spiked without an apparent reason and reached its highest level (1.2768) since October 21st.The currency pair then fell as the central bank mentioned the possibility of raising interest rates earlier than expected. EURUSD dropped to 1.2555 and then to 1.2438 on November 3rd. This was due to the positive impact of expected higher US interest rates on the dollar.

Example 2: The Influence of Aso’s Comments on USDJPY, November 21st, 2014

Another example for a significant statement occurred on November 21st after Japanese Finance Minister Taro Aso said that “the pace of the yen's drop against the dollar this week is too fast.”Aso added that the rapid moves in the Forex market are “undesirable.”Investors interpreted Aso’s comments as implying that the Japanese government wishes the yen to strengthen. As a result, USDJPY fell to 117.34 on November 21st.

Example 3: The Influence of Carney’s Comments on GBPUSD, January 13th-14th, 2015

A further example for a significant statement occurred on January 13th after Bank of England Governor Mark Carney said that the UK is “in an environment where you can expect that interest rates will increase, likely at a gradual and limited pace, so we are in a different spot.” Traders interpreted Carney’s comments as indicating that interest rates will rise. Consequently, GBPUSD rose to 1.5672 on January 14th.

The above examples illustrate how crucial it is for traders to be attentive to statements that could potentially have a rippling effect on the markets and thus on currency pairs. Ready to transform your trading plan?Alvexo's dealing room offers traders daily market analysis, technical analysis, breaking news and signal alerts. Make sure you follow our economic calendar for upcoming statements and economical events as well.