Meet the Central Banks
Central banks are the institutions that control monetary policy for their countries. They set interest rates, manage money supply, and try to maintain economic stability. When they speak, markets listen.
But what guides their decisions? Understanding central bank mandates—the legal goals they must pursue—helps you predict how they'll respond to economic changes.
Central Bank Mandates: What They're Required to Do
Every central bank has a mandate—a legal responsibility that defines what they must achieve. Think of it as their job description written into law. This mandate determines how they'll react when economic data is released.
There are two main types of mandates:
Dual Mandate
Required to balance two goals equally:
1. Keep inflation low and stable
2. Maximize employment
Who has it: Federal Reserve (USA), Reserve Bank of Australia, Reserve Bank of New Zealand
Single Mandate
Required to focus on one primary goal:
1. Keep inflation low and stable
(Employment is secondary)
Who has it: European Central Bank, Bank of England, Bank of Japan, Swiss National Bank, Bank of Canada
Why This Matters for Trading
Mandates explain why central banks react differently to the same economic situation. Here's the mechanism:
Scenario: Unemployment Rises
Federal Reserve (Dual Mandate):
"We must address unemployment—it's one of our two legal responsibilities. We'll cut interest rates to stimulate job growth." → Lower rates → USD weakens
European Central Bank (Single Mandate):
"Unemployment is unfortunate, but our legal responsibility is price stability. If inflation is already low, we might not act." → No rate change → EUR holds or strengthens vs USD
Scenario: Inflation Rises
Both types of central banks will typically raise rates to fight inflation—but banks with single mandates (like the ECB) often react faster and more aggressively because it's their only job. Banks with dual mandates must also consider the impact on employment, so they may move more cautiously.
Trading Insight
When analyzing economic data, ask yourself: "Given this central bank's mandate, how are they required to respond?" This helps you predict policy moves before they happen. If unemployment data is weak but inflation is high, a dual-mandate bank faces a tough choice, while a single-mandate bank has a clear path: fight inflation first.
The 8 Major Central Banks
Now that you understand what drives their decisions, here are the 8 major central banks you need to know as a forex trader:
Federal Reserve (Fed)
USDThe world's most important central bank. Decisions here affect every market globally.
Key meeting: FOMC (Federal Open Market Committee) meets 8 times per year
European Central Bank (ECB)
EURManages monetary policy for the 20 countries using the euro. The second most influential central bank.
Key meeting: Governing Council meets every 6 weeks
Bank of England (BoE)
GBPOne of the oldest central banks, managing UK monetary policy since 1694.
Key meeting: Monetary Policy Committee (MPC) meets 8 times per year
Bank of Japan (BoJ)
JPYKnown for keeping interest rates extremely low (often at zero or even negative) for many years to stimulate Japan's economy. The BoJ sometimes directly buys or sells yen to control its price when it moves too much.
Key meeting: Policy Board meets 8 times per year
Reserve Bank of Australia (RBA)
AUDManages Australia's commodity-driven economy. AUD is sensitive to China's economy and commodity prices.
Key meeting: First Tuesday of each month (except January)
Reserve Bank of New Zealand (RBNZ)
NZDOften one of the first to move in rate cycles. NZ economy is agricultural and dairy-focused.
Key meeting: 7 times per year
Bank of Canada (BoC)
CADCanada's economy is heavily tied to oil exports and US trade. CAD often moves with oil prices.
Key meeting: 8 times per year
Swiss National Bank (SNB)
CHFKnown for currency intervention to prevent CHF from getting too strong. CHF is a safe-haven currency.
Key meeting: Quarterly
Hawkish vs Dovish
Central bankers use specific language to signal their policy intentions. Learning to read this language gives you a huge advantage:
Currency Bullish
A hawkish central bank prioritizes fighting inflation over stimulating growth. They're likely to raise interest rates or keep them high.
Hawkish phrases to watch for:
• "Inflation remains too high"
• "Further rate increases may be necessary"
• "We are committed to price stability"
• "Labor market remains tight"
Market Reaction: Currency strengthens