WHAT IS MONETARY POLICY AND HOW IT AFFECT FOREX MARKET ?

Monetary policy is the process by which a central bank manages the supply and demand of money and credit in an economy. The goal of monetary policy is typically to promote economic growth, stabilize prices, and maintain financial stability. Central banks use various tools and policies to achieve these objectives, and their actions can have a significant impact on currency prices in the Forex market.

One of the key tools used in monetary policy is interest rates. Central banks can raise or lower interest rates to influence borrowing costs and inflation. Higher interest rates can attract foreign investment and increase demand for a currency, while lower interest rates can make a currency less attractive to investors and weaken its value.

Central banks can also use quantitative easing (QE) to stimulate the economy and increase the money supply. This involves purchasing government bonds or other securities to inject money into the economy. QE can increase inflation and reduce the value of a currency if investors expect future interest rates to remain low.

Central banks can also intervene in the currency market by buying or selling their own currency to influence its value. For example, a central bank may buy its own currency to strengthen its value or sell its own currency to weaken its value.

Overall, central banks play a critical role in the Forex market and can have a significant impact on currency prices through their monetary policy decisions and other tools. Traders should pay attention to central bank announcements and statements for insights into the future direction of monetary policy and potential currency movements.