Forex Fundamental analysis part 2 – Find out the tools the Central Banks have, to control inflation and price

Are you interested in knowing what controls inflation and price? Watch our latest video on Forex Fundamental analysis, part 2, to discover the tools that Central Banks use.

Forex Fundamental analysis part 2 – How to control price stability

Hi, traders! Welcome to the Fundamental Analysis Introduction, Part 2. Now, we’re going to consider in this video, the tools that the Central Banks have to make sure they control inflation and maintain price stability.

Now, the first area they use is Interest Rates. Now, interest rates are used by the bank to control inflation, as we discussed in the last video and if inflation is increasing above the Central Bank’s target rate, they will raise interest rates to control it. That’s the general rule of thumb and this encourages people to start saving and stop spending their money and that reduces the rate that inflation goes up.

An example of a Central Bank raising its interest rates can be seen in the chart here. Now, this was the Bank of Canada and the Bank of Canada surprised the markets on the 12th of July, in 2017, by raising interest rates. That’s a CAD positive move and the pair on the screen is the US dollar/Canadian dollar, and it fell very heavily with CAD being bought with a surprise hike. And you can see that over the next ten or so trading days, price moved over 300 points with very little retracement. That would have been an excellent scenario to use leverage to maximize your gains, as traders would have had the highest conviction that the trade would move in their direction.

Now, returning back to the next price tool. The next tool a Central Bank has is that of Price Control and that’s like when the bank communicates that it would like to see the currency at a certain price. So, another good example of this, is the Euro/Swiss Franc, when they had the floor at the 1.20 level and if price dropped towards that floor, then the Euro/Swiss Franc pair was bought, in order to defend the area, and that was a great opportunity to buy the Euro/Swiss Franc between 2012 and 2015.

The next area the Central Banks have is that of Language. The Central Banks make statements of where they want the price to be and they can issue threats. If price is not where they want to be, they can threaten to raise interest rates or threaten to start a quantitative easing program. So, sometimes a slight shift in emphasis on a Central Bank statement, a removal or an addition of a key phrase is enough to signal some of these key shifts in the bank’s central focus.

The final tool that Central Bank has to control inflation is Quantitative Easing and maintain stability, rather. The QE process that the banks use, is essentially printing money and then putting that money into the nation’s financial system. It stimulates growth and investment and it devalues a country’s currency and supports growth as the country’s exports become more competitive. It’s a very effective tool and it has paid a lot of attention by the markets.

So, when a Central Bank uses any of these four tools here, we can tune in the opportunities to make a profit. Banks tend to focus on one or maybe two specific indicators and by following the Central Banks over time, you get to see what the bank is focusing on. So, Fundamental Analysis works, it’s trusted and followed by nearly every single professional trader. So, why not make it work for you?

When the fundamental analysis is combined with technical analysis, traders are not only ready to read likely market direction but also identify key places to enter the market, take profit and place their stop-losses. That’s the end of this introduction to Fundamental Analysis Part 2.