This is the second part of my 2 part series on sentiment and the overall fundamentals in the Forex market.
In my previous post, i made mention of the fact that the Forex market is constantly cycling between being driven by sentiment and the overall fundamental outlook of an economy.
We understood that the sentiment is the mood of the market which can be very pessimistic and negative or optimistic and positive. Finally we concluded that in the case of a negative sentiment, currencies such as the JPY and CHF appreciate in value because the markets see these currencies as safe haven currencies.
In this part of the series i want to explain to you the other concept which determines the overall long term direction of currencies. What we are talking about is called Central bank Monetary policies.
Now every central around the world has a mandate to ensure the health of their respective economy is mantained. They do this by ensuring inflation does not get out of hand and also that the overall growth of the economy is at a certain optimal level.
Central banks achieve these goals by using certain tools to tackle them. one of the tools is interest rate adjustments and also after the 2008 global economic crisis, Quantitative easing.
Now when a central bank hikes interest rates and states that more is yet to come in the future, then investors from all over the world will move their capital to that economy to get return on their investments.
As retail traders, this becomes our opportunity to get in ahead of the pack and ride the wave, hence making money from the Forex market.
Now the perfect opportunity arises when we have two central banks doing the opposite of each other. i.e when one central bank is hiking interest rates and the other is cutting interest rates. The price of that currency pair will always go in one direction dropping thousands of pips to retail traders who knew what was going on.
So as retail traders, we need to know what moves the prices of currencies and how to trade them accordingly.