Preface:

Please check my last article of the same topic before reading this new one,

Trading Forex using margins or binary options (1).

Trading Forex using margins or binary options (2).

Introduction:

In the last article, Situation 1, trading strong news was discussed in one part which is Non-Farm Employment Change, in this article, different impacts will be explained here from last central banks decisions.

How Central banks affect markets:

At most time, Central banks affect market by monetary policy which resulted often in interest rate decision which considered the most important and influential data affecting currencies, such data often have surprises which can send the currency strongly higher or strongly lower.

Sometimes, Central banks tend to intervene in not settled time, due to special event or to face surprised crisis.
So central banks often affect markets by:

  • Interest rate.
  • Direct intervention.

Different interest rate decisions and its impact:

Different impacts will be shown after interest rate decision from central banks, as below :

  • Bank of Canada overnight rate:

Bank of Canada surprised markets at its last meeting (5, July, 2015) by interest rate cut to 0.5 from 0.75, the initial impact after data release, USD/CAD rose 133 pips in one minute,



Just a surprised data can wipe your account money if you use margins without strict risk management and your stop loss may be hit far than the one you set earlier.

  • Reserve Bank of New Zealand:

In Reserve Bank of New Zealand (RBNZ) last meeting (10, June, 2015), RBNZ surprised market by rate cut to 3.25 from 3.5, the first reaction was 188 pips lower, guess if you were trading the pair with margins, stop loss will not be enough to save your money.



  • Central Bank of the United States (FED):

At most times, Fed meeting is most important data affecting currency, bonds, stocks and commodities markets, often have strong impact, but usual after data release, pairs against US$ fluctuated in both directions before deciding a direction, let’s see what happened for majors, after last FED meeting (17, June, 2015), in the first 5 minute:

Pair
Open
High
Low
Close
Pips up from opening
Pips down from opening
EUR/USD
1.1265
1.1299
1.1205
1.1287
34
60
GBP/USD
1.5737
1.5779
1.5676
1.5762
42
61


In figure below, EUR/USD initial impact is explained :



In figure below, GBP/USD initial impact is explained :


As seen from table and figures, after FED decision, pairs against US dollar fell sharply at the first minute but then rose sharply and close above opening time of decision, often FED meeting statement need some time to be understood by investors, so often we see choppy movement after such release before making dominant direction.

To be continued next week,

Next week, Direct intervention of central banks will be discussed and then general evaluation will be assessed to choose the best trading method to use (Forex using margins or binary options). before central bank decisions.
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