“The decision reached by the apex bank of a country shows the economic health of such country, thereby affecting its currency strength.”
The apex bank of every economy in the world, meets each month to decide on the interest rate of the economy they are responsible for. One of the key decisions they make during this period is if they want to leave the exchange rate unchanged, lower or raise the rate.
This decision is paramount in determining the currency of the economy and as such, to traders. If the central bank decides to increase the rate, it also affects the value of the currency and a decrease means a lower value of the currency. On the other hand, if it decides to leave it unchanged, it can either have a negative or positive value depending on the perception of the economy.
For instance, in January 2015, the Bank of England (BoE) decided not to raise its interest rates. This decision, raised concern over the country’s economic health. As a result it made the Sterling less attractive in the currency markets.
In January the same year, the European Central Bank (ECB) decided to implement a Quantitative Easing (QE) program at the rate of €60 bn per month that lasted until September 2016. The decision which stated some conditions for countries under bailout like Greece, and Portugal, also forced forex traders to view euro with less confidence then. Despite having a big hit earlier, following the Swiss National Bank’s decision to unpeg its currency from that of the Eurozone, the decision sent the Euro spiralling to new lows in the currency markets.