A central bank is an autonomous or semi-autonomous institution entrusted with managing a state or monetary union’s monetary supply, currency and interest rates and is usually the supervisory authority for the local commercial banking system.
Central bank goals include keeping inflation at an optimum level, maintaining the exchange rate at a level conducive to a strong economy and controlling unemployment.
The world’s most important central banks include the United States Federal Reserve (Fed), the European Central Bank (ECB), the Bank of Japan (BOJ), the People’s Bank of China (PBC) and the Bank of England (BoE).
Central banks are instrumental in the FX market, since their monetary policies are a major driver of currency volatility. As a matter of fact, this is a tool of choice for most central banks to manipulate the exchange rate.
In the wake of the 2008 global financial crisis, the Bank of Japan, the Federal Reserve, the Bank of England and the European Central Bank all implemented extensive quantitative easing (QE) programmes, pouring huge amounts of ‘new’ money into the economy by purchasing financial assets. These QE policies, aimed at shoring up the economy by promoting lending and liquidity, as a collateral consequence tend to trigger sharp depreciation of the related currencies, which provides a competitive advantage in international trade.
After the ECB QE announcement in early 2015, which added some €1.1 trillion to the ECB’s balance sheet over the course of the following 18 months, the euro nose-dived against the US dollar, reaching levels near parity at 1.06 in March 2015.