Who Controls the Forex Market?

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Who Controls the Forex Market?

Every day, millions of people around the globe participate in the over 7 trillion dollars Forex market. It is an extremely interesting market that allows investors to speculate on whether one currency will rise or fall in value against the other and thus make profits.

So who controls the Forex market? Is there a single entity or governing body that oversees Forex trading?

While the global Forex market is decentralized, it is heavily controlled by four major institutions. 

If you intend to trade this market on a short-term basis or over a long-term period, it is vital that you keep a close watch on the big players controlling the Forex market as well as factors affecting the value of currencies.

Only in this way will you be able to trade Forex in a more calculated way, leaving luck alone.

Understanding the Forex market

Before diving fully into the question of control, it’s essential to grasp the structure of the Forex market. Unlike traditional centralized financial markets such as stock exchanges, the Forex market is decentralized. It operates 24 hours a day, five days a week, and spans across the globe, with major trading centers in cities like London, New York, Tokyo, and Sydney.

At its core, the Forex market involves the exchange of one currency for another. Traders, investors, corporations, financial institutions, and governments participate in Forex trading for various reasons, including hedging against currency fluctuations, speculating on price movements, and conducting international business transactions.

Read also: Why is the Forex Market Open 24 Hours a Day?

The institutions that control the Forex market

The institutions that control the Forex market - Federal Reserve
U.S. Federal Reserve

The four main institutions that influence the Forex market are 

  1. Central banks, 
  2. Commercial banks,
  3. Hedge funds and Institutional investors,
  4. Retail traders, 
  5. Forex brokers,
  6. High-frequency traders.

1. Central banks

Central banks are among the most influential participants in the Forex market. They are responsible for regulating a nation’s money supply, interest rates, and, to some extent, the value of the domestic currency. Central banks use monetary policy tools to stabilize their economies and intervene in the Forex market to manage exchange rates.

For example, the U.S. Federal Reserve, the European Central Bank (ECB), and the Bank of Japan are prominent central banks that impact the Forex market through policy decisions and interventions.

2. Commercial banks

Commercial banks play a crucial role as market makers in the Forex market. They facilitate currency trading for clients and themselves. Banks operate in the interbank market, where they conduct large volumes of transactions and provide liquidity. Their actions influence exchange rates and market dynamics.

3. Hedge funds and institutional investors

Hedge funds, investment banks, and other institutional investors engage in Forex trading to diversify portfolios and seek profits. Their substantial trading volumes can sway currency prices and market sentiment.

4. Retail traders

These market participants, including individual investors, comprise a significant portion of the FX market. They access the market through online brokers and trading platforms. While retail traders may not individually control the market, their collective actions can impact short-term price movements.

5. Forex brokers

Forex brokers act as intermediaries, connecting retail traders with the interbank market. They offer trading platforms, leverage, and access to currency pairs. Brokers influence traders’ experiences and execution speeds but do not control the broader market.

6. High-frequency traders (HFTs)

High-frequency trading firms use automated algorithms to execute a large number of trades within milliseconds. They focus on profiting from small price differentials and contribute to market liquidity. HFTs’ influence is most noticeable in fast-paced, high-liquidity currency pairs.

Factors that influence the value of currencies

Factors that influence the value of currencies

Now that you know who controls the Forex market, let’s discuss the several factors that influence the FX market on a day-to-day basis:

News of economic data

The economic calendar is a list in the form of an economic indicator that is used by investors every day.

Economic news in the form of the GDP report, jobs report and producer price indexes provide all-important high-impact news insights into this ultra-fast paced market.

Gross domestic product (GDP) is the most important and well-known economic report that provides a broad view on the economic performance of a country and especially on its power or strength.

Like the GDP, the employment report also helps investors in the Forex or even the binary trading market to predict future levels of economic activity.

The price index and retail sales also influence the economy and prices of trading instruments.

Interest rate and inflation

The interest rate on a currency is one of the major factors determining the value of a currency.

The interest rate is linked to inflation and the dollar exchange rate.

Rising interest rates cause the value of the currency to appreciate, thereby attracting more foreign capital resulting in a rise in exchange rates.

When the interest rate goes down in value, consumers have more money to spend, growing the economy and consequently causing the inflation rate to rise.

Changes in interest rates and inflation have an indirect effect on stock prices.

When interest rates are relatively low, companies buy new goods and assets, leading to an increase in income.

As a result, then, investors anticipate the asset’s purchase growth, and stock prices rise in value.

Economic recession

Should a country’s economy fall into recession, interest rates would be lowered, hampering the ability to acquire foreign capital. Consequently, its currency is weakening relative to other countries. This in turn is equivalent to a falling exchange rate.

Political stability and economic performance

Both affect the strength of a currency. 

A country with less risk of political turmoil is more likely to attract to foreign investors. As a result, investments flow into countries that are politically and economically stable. The result: the growth in foreign capital increases the value of the national currency.

Now the argument about the economic performance of the country:

A country with sound fiscal and trade policies exposes its currency to little risk. On the other hand, a country like Nigeria, prone to political and economic crises, is experiencing a devaluation of the naira.

Speculation

If the value of the U.S. dollar is expected to rise, investors will want to buy more of that it to make profits in the near future. Thus, the value of the dollar will surge due to increased demand. With this increase in currency value, the dollar exchange rate also rises.

So, who controls the Forex market?

In essence, the Forex market is a decentralized and dynamic ecosystem shaped by a multitude of participants and factors. No single entity or organization directly controls the entire market. Instead, control is distributed among the various players, each with its objectives and strategies.

Central banks wield significant influence through monetary policy decisions and interventions, impacting exchange rates and economic stability. Commercial banks, institutional investors, and retail traders collectively contribute to market liquidity and price discovery.

While no one entity controls the FX market, it operates under a framework of regulatory oversight. Different countries have regulatory authorities responsible for monitoring Forex brokers and ensuring fair and transparent trading practices.

Interest rate hikes, rising inflation, etc., have also been mentioned as drivers of price movements in the Forex market.

Knowing these factors is essential to keep up in the competitive FX market. Yes, you can maximize your profits when you choose a reliable Forex broker and trade at the right time.