The foreign exchange market is a network of financial institutions and brokers in which individuals, businesses, banks and governments buy and sell the currencies of different countries. They do so in order to finance international trade, invest or do business abroad, or speculate on currency price changes. On average, the equivalent of about $5 trillion in different currencies is traded daily in the forex market around the world.
One of the major players we have in the forex market are the banks. There are hundreds of banks participating in the forex network. Whether big or small scale, banks participate in the currency markets not only to offset their own foreign exchange risks and that of their clients, but also to increase wealth of their stock holders. Each bank, although differently organized, has a dealing desk responsible for order execution, market making and risk management.
Central Banks are institutions are utilized by nations around the world to assist in managing their commercial banking industry, interest rates and currency. Examples of Central Banking today include the Federal Reserve of the United States, European Central Bank (ECB), Bank of England (BOE), Bank of Canada, Bank of Japan and the Reserve Bank of Australia. There sphere of influence of a central bank may range from a single country such as the Reserve Bank of Australia or, represent policy created for a region or group of countries such as the ECB.
Central banks are extremely important players in the forex market. Open market operations and interest rate policies of central banks influence currency rates to a very large extent. Central banks are responsible for forex fixing. This is the exchange rate regime by which a currency will trade in the open market. Floating, fixed and pegged are the types of exchange rate regimes. Any action taken by a central bank in the forex market is done to stabilize or increase the competitiveness of that nation's economy.
The volume of trades made by retail investors is extremely low compared to that of banks and other financial institutions. But forex trading is growing rapidly in popularity. Retail investors base currency trades on a combination of fundamentals (interest rate parity, inflation rates, monetary policy expectations, etc.) and technical factors (support, resistance, technical indicators, price patterns). In this article, we have demonstrated exactly how banks affect the currency market. With this information, traders will be better informed as to how the market really works and how they can take an advantage of it.