Need to exchange currencies is the primary reason for the existence of Forex market and forex trading. The countries currency is mainly affected by its current and past economic, political and social conditions. The fundamental approach of Forex trading is particularly based on the strength of the two currencies and underlying factors affecting it.
The European Central bank or the ECB sets the key interest rates every six weeks for the Euro areas. The interest rates set by ECB are the rate of interest on which the banks of the European union grant loan and credit. The rates are also set for the central bank to grant loan to the commercial banks of the European union.
- Rates of interests set by the European Central bank or the ECB
Following are the three key rates set by the ECB:
- The rate of interest on the MRO or the Main refinancing operations which also provide liquidity bulk to the financing organisations.
This is the most important rate set by the ECB. The refinancing operations of the commercial banks take place regularly. During these operations, the Central bank fixes the cost of credit which it makes available to the commercial banks.
- The interest rate on the deposit facility.
This rate is the return on reserves that the commercial banks keep with the Central bank.
- The rate of interest on the marginal lending facility or discount rates.
Also known as the Marginal Loan rate, this rate is higher than the refinancing rate since it is purely intended for emergencies. If a commercial bank needs quick cash and is in need to borrow, they can get it at the discount rates from the Central Bank.
- The governing council of European Central bank
The governing council of European central bank or the ECB comprises or is headed by the two following bodies:
- The Executive Board
The executive board comprises of the following members:
The Vice president and
Four other members or representatives.
- The other composition of the ECB is the Presidents of the banks belonging to the Euro area (this includes all the 13 countries)
All the key rates are the instruments of economic regulation and to apply the monetary policies efficiently. The monetary policies of ECB are set with the aim of achieving stimulated economic growth and to put a check on the inflation rate.
- Effects of ECB rates on Euro
Whether the ECB rates rise or fall or just remain constant, they have a direct impact on the Euro. The reason being:
On increasing the rate, the ECB sells the financial securities to the major financial dealers and receive the payment directly in their account. This in turn would decrease the supply of EURO in the market and banking system resulting in appreciation in its value.
In case of cut in the ECB interest rates, the case goes vice versa. Now the ECB purchases the securities from the dealers. This results in boost in EURO supply and thus resulting in depreciation in its value.
- Impact of trading in ECB
During economic announcement or during the time when the European Central bank publishes its rates, several things run in the market.
The volatility indexes of the Euro are high and can rise up to 100 points with changes in rates while the blue chip stock market exchange, DAX may vary up to 300 points.
With the announcements of ECB interest rates, it is generally observed that the Forex trades widens and expands.
And as everywhere, on the day of announcement of the rate of interests by European Central Bank, there is a lot of speculation in the market.
During economic announcements and especially when the rate of the ECB is published, there are several things happening on the financial markets:
If you are the one who is new to forex trading, you shouldn’t hesitate to test during such kind of volatile market for first as a demo account. One should also feel free and should never hesitate to consult Economic Calendars beforehand to get a knowledge about such events to happen.
For profligate and the core traders, the ECB makes announcements. ECB holds great impact on the forex as well as the equity exchange market.
One certainly needs to follow the European Central Bank news to get updated with every announcement. The ECB make the announcements on Thursday usually in the beginning of the month and the announcements are made once a month at 11:45 AM by the GMT. The fraudulent spread a news of announcements being made every Thursday but certainly that not the case. After every ECB announcement, a press conference and the ECB meeting are followed. This conference attracts forex and index traders and the investors too.
Impact of ECB on the Market
Experienced traders usually trade only in ECB and other major publications. Such plan is mainly followed only by the professionals and experienced traders and the ones with a certain strategical plan.
Announcement effects of ECB and FED
Both the bodies make significant effect. Do you want to know if there is rise or fall in Euro Dollar rate on increase in FED interest rate?
Theoretically, rising interest rates make the assets investment attractive. The higher the interest rate the higher the investors remuneration. Thus, Dollar climbs in US publications in favour on increase infeed rates. But this is not a constant case because if this would have been the principle, we all would have been millionaires.
In reality both the FED and ECB hold some scenarios. The announcements made in line in harmony, in such case the market may have foreseen the decisions related to the ECB key rate. This results in a more certain gamut of motion at the time when the publication is made. In an opposite case, strong reactions are observed. The power of reaction is completely based on the expectation and the announcement made.
Now you might have a better idea of ECB key rates and their impacts. If you are a beginner or an experienced one, Admiral Market provides you free unlimited demo accounts for safe trade. Visit us at https://admiralmarkets.fr/formation/articles/analyse-forex/taux-directeur-bce and discover if the ECB trading is suitable for you or not.