A central bank is an organization that manages the currency of a country or group of countries and controls the money supply.
Central banks have the most influence on global markets.
They can be opaque and arcane institutions, but they’re behind much of what goes on in the economy.
It’s important for the average trader to understand what the central banks are doing.
By being aware of what central banks are able to do and the impact their policies may have, you’ll have a much better understanding of the way markets move.
In financial jargon, when a central bank is cutting interest rates it's said to be “loosening monetary policy” or "easing", and when interest rates are rising the bank is “tightening monetary policy” or just "tightening".
Are the central banks easing policy? Are they lowering rates? Are they buying assets? If so, this adds money (liquidity) into the system and usually bearish for the currency.
Are they tightening monetary policy? Are they raising interest rates and/or selling assets? If so, this removes liquidity out of the system and usually bullish for the currency
As a short-term trader, understanding central banks, what they’re doing, and what they plan to do, is still of critical importance.
Their actions, words, and forward guidance can have a huge effect on the FX market and the overall financial market.
Here's a trader's guide on the world's major central banks.