Does central banks news has impact on market forecasts and thereby cause severe currency fluctuations? Studies suggest that yes, it does. Moreover, currency fluctuations can be caused not only by news on monetary policy decisions, but also by the words on the subsequent press conferences, which capable of causing a strong reaction in the market.
Over the past few years it has become evident that the European Central Bank (ECB), the US Federal Reserve and the Bank of England hold their press conference after the adoption of important decisions to inform the markets about the direction of movement of its monetary policy. Forex trading can react instantly. Within minutes, there can be abrupt movements of the national currency of the central bank that made the announcement.
News of central banks is an integral part of fundamental analysis, and, as in the case of other economic events, the main factor causing the currency fluctuations are market forecasts. If the acceptance or rejection of the measures planned by the central bank line with market expectations, the reaction is generally absent, because the event was already predicted and reflected in the exchange rate before the announcement.
Usually such news as changes in interest rates that caught the markets by surprise are not often happens, so there are no sharp currency fluctuations after the announcement of the central bank. There can be some slight fluctuations but usually the bank's actions have already predicted and reflected in the exchange rate.
A good example is the reaction of the market on one of the ECB news this year, when the bank announced the continuation of the previous monetary policy. Markets expect such a decision to keep interest rates unchanged, so the fluctuations in the market were not followed.
Forty-five minutes later the ECB held its monthly press conference, as always after the announcement of the interest rate. Traders listened attentively speech by ECB President, trying to catch hints at the future direction of monetary policy of the bank. In the language of central banks the hawk (bullish) monetary policy indicates a rise in interest rates in the future, and the bearish predicts a fall. The keyword here is vigilance.
If traders hear that word - vigilance – from the central banks’ officials regarding future monetary policy, they expect increase of the key interest rate.
This is a good example for beginners, trading on the events of fundamental analysis: you should not rely only on the decision of the central bank but also listen carefully to the following press conference.