Central banks play a pivotal role in shaping the Forex market as they set monetary policy and control the supply of money in an economy. They also influence interest rates, which directly impact currency values. In this lesson, we will discuss the primary functions of central banks and how their actions affect the Forex market.

Functions of Central Banks:

1. Implementing monetary policy: Central banks use various tools to adjust the money supply and interest rates, with the ultimate goal of achieving economic stability, controlling inflation, and promoting growth. Their actions can directly affect currency values in the Forex market.

• • Open market operations: Central banks buy or sell government securities to regulate the money supply. When they buy securities, they inject money into the economy, while selling securities reduces the money supply.
  • Interest rates: Central banks set the benchmark interest rates at which commercial banks can borrow or lend money. Lower interest rates stimulate borrowing and spending, while higher rates encourage saving and reduce inflationary pressures.
  • Reserve requirements: By changing the reserve ratio (the percentage of deposits that commercial banks must hold as reserves), central banks can control the amount of money available for lending.

1. Issuing currency: Central banks issue and regulate the supply of their national currency. They have the authority to print new money or withdraw old currency from circulation, which can impact its value in the Forex market.
2. Managing foreign exchange reserves: Central banks hold foreign currencies and gold reserves as a means of stabilizing their national currency and intervening in the Forex market when necessary. They may buy or sell their own currency in the market to influence its exchange rate and maintain stability.
3. Lender of last resort: In times of financial crisis, central banks provide emergency funds to commercial banks and other financial institutions to maintain stability and prevent collapse. They serve as a backstop to ensure the financial system remains functional during periods of extreme stress, which can impact currency values.

Major Central Banks:

1. Federal Reserve (Fed) - United States
2. European Central Bank (ECB) - Eurozone
3. Bank of Japan (BOJ) - Japan
4. Bank of England (BOE) - United Kingdom
5. Swiss National Bank (SNB) - Switzerland
6. Bank of Canada (BOC) - Canada
7. Reserve Bank of Australia (RBA) - Australia
8. Reserve Bank of New Zealand (RBNZ) - New Zealand

As a trader, it's crucial to keep an eye on central bank actions, as changes in monetary policy can lead to significant price movements in the Forex market. In the upcoming sections, we will discuss various economic indicators that central banks use to set their policies and their impact on currency prices.