Key Central Banks

Central banks are the pillars of the global financial system, shaping the economic policies of nations, managing monetary circulation, and stabilizing currency markets. Their decisions impact billions of people, from investors on Wall Street to entrepreneurs in developing countries. In this article, we will thoroughly explore what central banks are, the functions they perform, how the largest ones are structured, and how their actions shape the dynamics of financial markets, including the FOREX market. You will learn about key monetary policy tools, the impact of interest rates, and the specifics of trading sessions.

What is a Central Bank?

A central bank is a national or supranational financial institution responsible for managing monetary policy, regulating money supply, and maintaining economic stability. It acts as the architect of the financial system, ensuring a balance between inflation, employment, and economic growth. Central banks not only control money issuance but also serve as regulators of the banking sector, protecting the economy from crises.

Unlike commercial banks, central banks do not serve private clients. Their clients are governments, banks, and international organizations. The primary mission of a central bank is to create conditions for sustainable economic development, minimize inflationary risks, and prevent financial shocks.

Economic Stability: Central banks aim to keep inflation at a target level (e.g., around 2% in most developed countries) and support high levels of employment.
Bank Supervision: They regulate the activities of commercial banks, setting requirements for capital and liquidity to prevent systemic risks.
Lender of Last Resort: During crises, central banks provide emergency loans to banks and other financial institutions to prevent their bankruptcy.
Currency Issuance: Central banks hold a monopoly on issuing national currency, allowing them to control the money supply.

Central banks also actively participate in international economic relations, coordinating actions with other countries through organizations like the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). Their policies shape global financial trends, influencing the value of assets, trade, and investments.

Major Central Banks of the World

There are numerous central banks worldwide, each playing a unique role in its economy. However, a few stand out due to their global influence. Let’s examine the largest central banks, their structures, functions, and peculiarities.

1. Federal Reserve System (FRS)

The Federal Reserve System (Federal Reserve System, FRS) — the central bank of the United States, established in 1913 following a series of banking panics to ensure the stability of the financial system. The FRS is a unique structure, comprising 12 regional Federal Reserve Banks, coordinated by the Board of Governors in Washington.

Main Functions: Regulating money supply, managing interest rates, supervising the banking system, and maintaining the stability of the U.S. dollar, which is the world’s reserve currency.
FOMC: The Federal Open Market Committee (FOMC) is the key body making monetary policy decisions. FOMC meetings, held 8 times a year, attract global investor attention as they determine the level of the federal funds rate.
Tools: The FRS uses open market operations, reserve requirement adjustments, and the discount window to manage liquidity.

FRS decisions carry global significance, as the U.S. dollar dominates international trade and financial transactions. For example, raising interest rates in the U.S. can trigger capital outflows from developing countries, increasing pressure on their currencies. In 2022–2023, the FRS actively raised rates to combat inflation, leading to a stronger dollar and volatility in global markets.

The Federal Reserve System also plays a role in crisis management. During the 2008 financial crisis and the COVID-19 pandemic, the FRS launched massive quantitative easing (QE) programs, purchasing government bonds and mortgage-backed securities worth trillions of dollars to support the economy.

2. Bank of England (BOE)

The Bank of England (Bank of England, BOE), founded in 1694, is considered one of the oldest central banks in the world. It was established to finance military campaigns and later became the key regulator of the British economy. Today, the BOE manages the UK’s monetary policy and ensures the stability of the pound sterling.

MPC: The Monetary Policy Committee (MPC) consists of 9 members, including the bank’s governor, and meets monthly to make decisions on the base interest rate and other measures.
Main Objectives: Maintaining inflation at 2%, promoting economic growth, and ensuring financial system stability.
Tools: The BOE actively uses operations with government bonds (gilts), currency interventions, and quantitative easing programs.

The Bank of England played a significant role in managing the aftermath of Brexit and the pandemic. For instance, in 2020, the BOE lowered interest rates to a historic low (0.1%) and expanded its QE program by £200 billion to support the economy. BOE decisions are particularly important for FOREX traders, as the pound sterling is among the most traded currencies.

Beyond monetary policy, the BOE is responsible for issuing banknotes and coins, as well as managing the UK’s gold reserves. Its actions often set the tone for European financial markets, especially during periods of economic uncertainty.

3. European Central Bank (ECB)

The European Central Bank (European Central Bank, ECB), established in 1998, manages the monetary policy of the 20 eurozone countries. Its primary goal is to maintain price stability, i.e., keeping inflation around 2%. The ECB plays a unique role, coordinating policies for economies with varying levels of development — from Germany to Greece.

Headquarters: Frankfurt am Main, Germany.
Leadership: The Governing Council, consisting of 6 executive board members and the governors of the national central banks of eurozone countries.
Main Functions: Setting interest rates, controlling money supply, and maintaining euro stability.

The ECB employs tools such as the main refinancing rate, deposit rate, and targeted longer-term refinancing operations (TLTRO). During periods of low inflation (2010s), the ECB introduced negative interest rates and large-scale QE programs to stimulate the economy. In 2022–2023, the bank began raising rates to combat inflation driven by rising energy prices and supply chain disruptions.

ECB decisions have a massive impact on the currency market, as the euro is the second most important global currency after the U.S. dollar. Traders closely monitor speeches by the ECB president (in 2025, Christine Lagarde) and the bank’s economic forecasts to predict movements in the EUR/USD pair.

4. Bank of Japan (BOJ)

The Bank of Japan (Bank of Japan, BOJ), founded in 1882, manages the monetary policy of one of the world’s largest economies. Japan is known for its unique economic model, characterized by low interest rates and deflationary trends, making the BOJ’s role particularly critical.

Leadership: BOJ Governor (in 2025, Kazuo Ueda, who succeeded Haruhiko Kuroda in 2023).
Features: The BOJ actively uses quantitative and qualitative easing (QQE) and yield curve control (YCC) to keep the yield on 10-year government bonds within a specific range.
Objectives: Achieving 2% inflation, maintaining yen stability, and promoting economic growth.

Japan has battled deflation for decades, prompting the BOJ to adopt unconventional measures. For example, since 2016, the bank has applied negative interest rates (-0.1%) to part of bank reserves. The BOJ is also a major buyer of government bonds and even equities through ETFs, making it one of the most active central banks in financial markets.

BOJ actions are highly significant for FOREX traders, particularly for the USD/JPY pair. The bank’s currency interventions, aimed at preventing excessive yen appreciation, often trigger sharp market movements. For instance, in 2022, the BOJ spent over $60 billion on interventions to stabilize the yen.

5. Swiss National Bank (SNB)

The Swiss National Bank (Swiss National Bank, SNB) manages Switzerland’s monetary policy, one of the most stable economies in the world. The Swiss franc is considered a "safe haven," making SNB actions particularly important during periods of global instability.

Leadership: Chairman of the Governing Board (in 2025, Martin Schlegel, who succeeded Thomas Jordan).
Features: The SNB actively intervenes in the currency market to prevent excessive franc appreciation, which could harm exporters.
Tools: Negative interest rates (-0.75% in 2015–2022), currency interventions, and management of foreign exchange reserves.

The SNB is unique as a publicly traded joint-stock company, though the majority stake is state-owned. The bank manages some of the world’s largest foreign exchange reserves (around $800 billion in 2024), enabling large-scale interventions. For example, from 2011–2015, the SNB pegged the franc to the euro at 1.20 to curb its appreciation.

For FOREX traders, the USD/CHF and EUR/CHF pairs are particularly sensitive to SNB decisions. The bank’s monetary policy statements or unexpected interventions can trigger sharp volatility spikes.

The Role of Central Banks in the FOREX Market

Central banks play a pivotal role in the FOREX market, which processes transactions worth over $7.5 trillion daily (according to BIS data for 2024). Their policies directly influence currency values, shaping trends and creating trading opportunities. The main tools of central banks include interest rates, currency interventions, quantitative easing, and public statements.

FOREX is a decentralized market where currency pairs such as EUR/USD, GBP/JPY, and AUD/USD are traded. Central banks influence these pairs through their decisions, which determine the attractiveness of currencies for investors. For example, raising interest rates makes a currency more appealing for carry trade, while lowering rates can weaken its exchange rate.

The primary goal of central banks in the FOREX market is to maintain the stability of the national currency, which is crucial for exports, imports, and overall economic competitiveness. However, their actions can trigger both short-term volatility and long-term trends.

Main Tools of Central Bank Influence

Interest Rates: This is the primary tool of monetary policy. Raising rates increases the yield of assets in a given currency, attracting capital and strengthening its exchange rate. For example, in 2023, the FRS raised rates to 5.25–5.5%, which led to a rise in the dollar against the euro and yen.
Currency Interventions: Central banks can buy or sell currency on the open market to adjust its exchange rate. The SNB and BOJ regularly use this tool to manage the franc and yen.
Quantitative Easing (QE): Purchasing assets (bonds, stocks) increases the money supply, which can weaken a currency. The ECB and BOJ actively used QE in the 2010s.
Forward Guidance: Statements about future policy (e.g., "rates will remain low until 2026") shape investor expectations and influence market trends.
Macroeconomic Forecasts: Publication of data on GDP growth, inflation, or employment sets the tone for market sentiment.

Each tool has its own specifics. For example, currency interventions are effective in the short term but require significant reserves. QE, on the other hand, has a long-term impact but can heighten inflationary risks.

FOREX Trading Sessions

The currency market operates 24 hours a day, 5 days a week, divided into three main sessions: Asian, European, and American. Each has unique characteristics that traders use to develop strategies.

Asian Session

The Asian session begins at 00:00 GMT with the opening of trading in Tokyo, Sydney, and Hong Kong. It is considered the least volatile, making it suitable for low-risk strategies.

Currency Pairs: USD/JPY, AUD/USD, NZD/USD, and EUR/JPY are the most active due to the participation of Japan, Australia, and New Zealand.
Volatility: Low, but it can spike sharply during the release of data from China or BOJ interventions.
Key Events: BOJ decisions, Chinese export data, and Australian economic reports (e.g., employment levels).

The Asian session attracts traders who prefer range trading, as large movements are rare, except during unexpected news.

European Session

The European session starts at 07:00 GMT with the opening of Frankfurt and London. This is the most active period, accounting for up to 40% of daily trading volume.

Currency Pairs: EUR/USD, GBP/USD, USD/CHF, and EUR/GBP exhibit high liquidity.
Volatility: High, especially after the release of inflation data, PMI, or ECB decisions.
Influence: Statements from the ECB, BOE, and SNB, as well as economic reports from Germany and France.

London is considered the financial capital of the world, so the European session sets the tone for global markets. Traders use it for trend-based strategies, as major movements often start here.

American Session

The American session begins at 13:00 GMT with the opening of New York. It overlaps with the European session, creating a peak in market activity.

Currency Pairs: EUR/USD, USD/JPY, GBP/USD, and USD/CAD are the most popular.
Volatility: Maximum, especially during the release of employment data (NFP), inflation (CPI), or U.S. GDP figures.
Role of the FRS: FOMC decisions and speeches by the FRS chair (in 2025, Jerome Powell) trigger sharp price movements.

After European markets close (around 17:00 GMT), activity declines, but Friday sessions are often volatile due to position closures before the weekend.

Importance of Trading Sessions for Traders

Understanding the specifics of trading sessions allows traders to optimize their strategies. For example:

Asian Session: Suitable for scalping and range trading due to low volatility.
European Session: Ideal for trend-based trading, as major movements often begin here.
American Session: Best for news-driven trading, as U.S. data triggers significant price swings.

Traders should also consider the economic calendar. For instance, the release of FOMC minutes or ECB decisions can radically alter market trends. Combining technical analysis with fundamental data increases the chances of success.

How Central Banks Influence the Global Economy

Central banks are the architects of the global financial system, whose decisions shape not only currency markets but also global economic trends. Their policies have a multifaceted impact on the economy, determining price levels, growth rates, the state of financial markets, and trade relations between countries. Understanding these processes helps investors, traders, and businesses adapt to changes and leverage them to their advantage.

Inflation: Low interest rate policies stimulate price growth, as cheap loans boost consumer demand and investment. However, prolonged easing can trigger hyperinflation. High rates, conversely, curb inflation by reducing the money supply but may slow economic activity. For example, in 2022, inflation in the eurozone hit 9.1%, forcing the ECB to raise rates to 4% by 2023.
Economic Growth: Quantitative easing (QE) programs and low rates support investment in business and infrastructure, stimulating consumption. However, excessive easing can lead to economic overheating, creating asset bubbles in markets like real estate or stocks. For instance, the FRS’s $4 trillion QE in 2020–2021 accelerated U.S. economic recovery but drove up housing prices.
Financial Markets: Changes in interest rates directly affect asset values. Raising rates reduces the attractiveness of stocks and bonds, as investors seek higher-yield alternatives, potentially leading to stock market corrections. Lowering rates, conversely, boosts asset prices. For example, the BOJ’s decision to maintain zero rates in 2024 supported the Japanese Nikkei index, which rose by 15% over the year.
International Trade: A stronger national currency, driven by high rates, makes exports more expensive, reducing the competitiveness of local producers but lowering import costs. A weaker currency, conversely, boosts exports. For example, the yen’s 20% weakening against the U.S. dollar in 2022–2023 increased Japanese car exports but raised the cost of imported energy.
Global Debt Markets: Central bank decisions impact borrowing costs for countries and corporations. Raising rates increases debt burdens, especially for emerging economies. In 2023, Latin American countries faced rising debt servicing costs due to the FRS’s tighter policy.

Central banks play a critical role in managing economic crises. In 2020, coordinated actions by the FRS, ECB, and BOJ, including cutting rates to 0–0.25% and launching QE programs worth trillions of dollars, mitigated the downturn caused by the COVID-19 pandemic. These measures boosted liquidity, supported stock markets, and prevented widespread bankruptcies. However, in 2022–2023, sharp rate hikes to combat inflation (e.g., FRS to 5.5%, ECB to 4%) slowed economic growth in Europe and increased debt pressures on emerging economies like Argentina and Turkey.

Additionally, central banks influence global capital flows. When the FRS raises rates, capital flows into dollar-denominated assets, leading to investment outflows from emerging markets. In 2022, the MSCI Emerging Markets index fell 20% due to dollar strengthening. Conversely, Japan’s low-rate policy makes the yen attractive for carry trade, where traders borrow in yen to invest in high-yield assets.

Another aspect is climate policy. Central banks like the ECB and BOE have begun integrating environmental factors into their strategies, supporting green bonds and assessing climate risks to financial stability. For example, in 2024, the ECB launched a refinancing program for banks investing in sustainable projects, potentially reshaping Europe’s investment landscape.

Tips for Traders and Investors

The influence of central banks on financial markets makes their actions a critical factor for traders and investors. To effectively capitalize on market opportunities and minimize risks, follow these recommendations based on analysis of monetary policy and market trends:

Monitor News: Use economic calendars to track key events, such as FOMC, ECB, or BOJ meetings, minutes releases, and economic data (inflation, GDP, employment). For example, the U.S. Non-Farm Payrolls report often triggers sharp movements in the EUR/USD pair. Subscribe to news platforms like Bloomberg or Reuters for real-time updates.
Analyze Rhetoric: Speeches by central bank heads, such as Jerome Powell (FRS) or Christine Lagarde (ECB), contain hints about future policy. Pay attention to terms like "hawkish" (policy tightening) or "dovish" (easing). For instance, in 2023, Lagarde’s hint at further rate hikes led to a 2% euro rise in a week.
Manage Risks: Central bank decisions spark high volatility, especially during rate announcements or QE updates. Use stop-losses and take-profits to limit losses. For example, FOREX traders often reduce positions before FOMC meetings to avoid unexpected price spikes. Keep risk per trade within 1–2% of your deposit.
Study History: Analyzing past central bank decisions helps predict their actions. For example, examining market reactions to ECB’s QE in 2015 can shed light on how the euro might behave under new easing programs. Use BIS or IMF data for long-term trend analysis.
Consider Global Context: One bank’s decisions affect other regions. For example, FRS rate hikes can weaken emerging market currencies, creating opportunities for trading pairs like USD/BRL. Monitor asset correlations to diversify your portfolio.
Use Technical Analysis: Combine fundamental analysis (bank news) with technical analysis to identify entry points. For example, support and resistance levels on USD/JPY often react to BOJ interventions. Indicators like RSI or MACD help detect overbought or oversold conditions.

For long-term investors, it’s crucial to consider the monetary policy cycle. For instance, during high-rate periods, bonds become more attractive, while stocks may decline. In 2022, FRS rate hikes led to an 18% drop in the S&P 500 but boosted U.S. Treasury yields to 4%. Adapt your strategy to current bank policies to optimize returns.

It’s also worth exploring alternative information sources, such as reports from analysts at Goldman Sachs or JPMorgan, which often forecast central bank actions. Participating in webinars and forums dedicated to FOREX and investing can deepen your understanding of monetary policy and its market impact.

Conclusion

Central banks are not just regulators but the driving force behind the global economy, with their decisions shaping financial markets and setting the course for global trends. Their policies on interest rates, currency interventions, and quantitative easing determine currency values, inflation levels, asset yields, and investor sentiment. The actions of the FRS, ECB, BOJ, BOE, and SNB impact not only FOREX traders but also long-term investors managing portfolios of stocks, bonds, and commodities.

Understanding how central banks operate is key to success in financial markets. Traders must monitor economic calendars, analyze bank leaders’ rhetoric, and manage risks effectively to profit from volatility. Investors need to consider the long-term implications of monetary policy, such as the impact of rates on asset values or countries’ debt burdens. For example, the FRS’s tightening cycle in 2022–2023 showed how quickly markets can shift from growth to correction, underscoring the importance of strategic flexibility.

In 2025, amid challenges like climate risks, financial digitization, and geopolitical instability, the role of central banks becomes even more significant. They are adapting to new realities, introducing digital currencies (CBDC), supporting green investments, and balancing inflation with growth. Knowledge of their strategies and tools provides a competitive edge, enabling informed decisions in the dynamic world of finance. Whether trading currency pairs, investing in ETFs, or hedging risks, a deep understanding of central bank policies remains the foundation of financial success.