How Central Bank Monetary Policies Affect Your Trades

Now, don't worry, because technical analysis isn't going away anytime soon, and pure price action is still going to the sole basis for trade selection and execution going forward. But every longer-term trader—even the most loyal technicians out there—need central bank monetary policies working in their favour if they hope to sustain price-action-based set-ups across the currency pairs they trade.

So here's what central bank monetary policies really mean to traders in this modern era, and a look at how the current policies of key central banks may impact your trades throughout the months ahead.      

How Monetary Policies (Should) Affect Your Trade Decisions

Because it's exceedingly rare for central bank monetary policies to change suddenly and without warning, this isn't a factor longer-term traders must obsess about day in and day out. But given the market-moving power of news and central bank policy statements, it's wise to know when central bank meeting minutes and especially rate decisions are hitting the markets, and avoid trading specifically around those announcements. Whipsaws and (often temporary) countertrend moves tend to occur at those times, which makes it much more difficult to get a good entry and avoid being stopped out by higher-than-normal volatility.

Instead, maybe wait for end of day, or consider trading on the weekly time frame to smooth out the intraday choppiness and trade in the direction of the prevailing trend instead.

Central bank monetary policies may also play a factor in choosing which currency pair(s) to trade. Longer-term traders may do well to select pairs like USDJPY, EURUSD, USDCAD, or GBPJPY for which diverging policies are in play. This means one central bank is tightening policy and/or pursuing higher rates while another is lowering rates, loosening policy measures, or even pursuing quantitative easing. This condition, coupled with a favourable technical signal(s) on the charts, could give rise to long and sustainable trend moves, the kind that every swing trader hopes for.

What Major Central Bank Monetary Policies Are Saying

In the weeks and months ahead, traders will no doubt keep a close eye on geopolitical risks like terrorism, ongoing conflicts involving Russia, Syria, and North Korea, and the latest Brexit developments. In addition, though, here's the current monetary policy stances held by seven (7) of the world's central banks, any of which have the ability to change the direction and trend for a host of major currency pairs. Knowing these will help you with the inter connected side of markets.

European Central Bank (ECB)

ECB President Mario Draghi has reiterated the Bank's commitment to continued easing at a rate of €60 billion per month through the end of 2017. Easy-money policies may be largely built in to current Euro (EUR) pricing, but the outcome of Brexit talks could put further pressure on the shared currency this summer and beyond.

U.S. Federal Reserve

Despite political risks, most of which stem from President Trump's controversial policies and administration, the Fed seems undeterred and on pace to raise rates at least once (and perhaps twice) before year-end. This tighter policy stance is a significant factor promoting continued US dollar (USD) strength, particularly against currencies like the EUR and Japanese yen (JPY), whose central banks are committed to continued easing and more defensive policies.

Bank of England (BOE)

Recent hawkish rhetoric from BOE officials including Governor Mark Carney suggest reduced stimulus and tighter central bank monetary policies upcoming, yet the possibility of a Brexit still clouds the overall outlook for both the UK economy and the British pound (GBP) for the time being.

Bank of Japan (BOJ)

Much like the BOE, the BOJ remains locked in to "emergency" QE measures that have made for sustained JPY weakness against a host of currencies. And while Japan is likely to maintain easier monetary policies and QE longer than the UK will, there have been limited rumblings about slight improvements in the (still-troubled) Japanese economy of late.

Bank of Canada (BOC)

The BOC has maintained its benchmark interest rate at a record-low 0.50%, a level where it's likely to remain in the near term. And while Canada's economy could be showing signs of improvement, look for accommodative central bank monetary policies to prevail, at least for the time being.

Reserve Bank of Australia (RBA)

Australia is undergoing a "transition economy" that's moving away from raw materials and mining as its primary exports. With that, the RBA has left rates at all-time lows near 1.5%, but Bank officials seem concerned that an appreciating currency could sideline transition efforts. This seems to suggest a potential for tighter monetary policies and perhaps higher rates in the near-term future.

Reserve Bank of New Zealand (RBNZ)

Despite signs of economic improvement, the RBNZ remains committed to accommodative monetary policies for the months ahead, and perhaps all the way into Q1 2018, as current RBNZ Governor Graeme Wheeler will depart 26 September and be replaced by acting Governor Grant Spencer for a period of six months.