Monetary Policy Statement: What you need to know

Monetary Policy Statement: What you need to know

Almost every month in the economic calendar, traders can see such events as the monetary policy meeting minutes. As a rule, during the publication of this protocol, the volatility increases sharply. Let's find out what this protocol is and whether it is possible to make money on it.

Monetary policy is a macroeconomic policy set by a country's central bank. It involves the management of the money supply and the interest rate. It is the economic policy used by a country's government to achieve macroeconomic goals, such as inflation, unemployment rates, and economic growth. Of course, the main leverage for influencing policy is interest rate changes. But beyond the rate, there are other tools to manage monetary policy. For example, buying or selling government bonds, changing the amount of cash circulating in the economy by printing cash, or removing money from the system. In other words, the main purpose of monetary policy is to regulate the money supply so that both the government and ordinary people feel good.

We will not go too deeply into economic terminology. We will only add that there are two types of monetary policy normalization: expansionary monetary policy (easing policy) and restraining monetary policy (tightening policy).

Expansionary monetary policy aims to increase the money supply in the economy by reducing interest rates, printing money, buying government securities by central banks, and reducing reserve requirements for banks. The purpose of expansionary monetary policy is to stimulate economic growth (increase GDP, reduce unemployment, raise industry level). However, it leads to higher inflation. The national exchange rate declines with such a policy, and stock indices tend to show growth.

A restraining monetary policy aims to reduce the supply of money in the economy. This can be accomplished by raising interest rates, cutting the balance sheet, selling government bonds, and increasing reserve requirements on banks. The restraining policy is used when the government wants to control the rate of inflation. However, it leads to slower economic growth (declining GDP, rising unemployment, falling industrial indicators). With this policy, the national exchange rate rises, and stock indices tend to show a decline.

Countries such as the US, Australia, New Zealand, Canada, and Europe are currently restraining monetary policy. Countries such as Japan and China are pursuing expansionary policies.

How can an ordinary Forex trader make money on this?

The key point is that it is necessary to trade proactively. The monetary policy minutes protocol is published with a delay of several weeks. The data that traders and investors see in protocol has already been factored into prices. In that case, it is necessary to follow the speeches of central bank officials, who give hints about what moods prevail inside the central bank.

Let's look at a concrete example. Over the last two weeks, the European Central Bank representatives, in their speeches, started to talk a lot about how the ECB is lagging behind the Fed in terms of tightening monetary policy. More and more representatives have begun to lean toward moving from a soft policy to a tighter one by ending the bond-buying program and raising interest rates in Q2 or Q3. As soon as this information went public, the euro strengthened, even before the ECB's official protocols. This is exactly the case when "Buy the rumor, sell on fact."

That is why traders need to follow not only the speeches of the heads of central banks but also of individual representatives. Talks and rumors about policy tightening will help the national currency to strengthen, and vice versa.

by JustMarkets, 2022.06.14

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