By Giles Coghlan (pictured), Chief Currency Analyst at HYCM
Less than a week ago, traders and investors were sitting tight, awaiting the release of the latest minutes from the Federal Reserve’s Open Market Committee (FOMC) meeting. In the current climate, where international economic outlooks still hinge on the development of the COVID-19 situation, successful vaccine rollouts, and the threat of the Delta variant, these insights should be of particular note to investors.
Why? Put simply, statements like these are some of the most vital yet underrated tools investors have at their disposal. As well as providing a snapshot of global financial activity, central bank statements allow traders to glean an insight into any changes in perspective, or sudden shifts that might move the markets.
Often, these comments, whether obvious or concealed, have the potential to create high levels of volatility in the markets, so it is advisable that investors and traders get to grips with central banks and the messaging they are trying to communicate.
Typically, central banks tend to focus on four core economic indicators: production, employment, growth, and inflation. Of these, the single most important area for investors and traders to take note of is inflation, which concerns the cost of goods and services. All banks will have a target rate or band that they would like their inflation level to be at – this is usually set at 2%, but each central bank will clearly state their own policy.
Likewise, investors should also pay careful attention to interest rates, which have a strong and direct value of currencies – even the slightest hint from a central bank about potential interest rate alterations can result in economic volatility. When these rates rise, this can be seen by investors as an indication that the economy is witnessing strong growth and market confidence – in turn, a rise in interest rates will curb levels of high inflation.
This fact often increases the demand for the local currency as investors typically want to invest in a currency which is backed by a strong and stable economy.