The target is the starting point
A central bank does not aim at the currency, at share prices or at growth for its own sake. It aims at the target it was given, and the exchange rate is a by-product of getting there. Those targets are public.
- Federal Reserve (USD): two jobs at once, stable prices and maximum employment. That is why both the inflation figure and the jobs report can dominate, depending on which side looks more out of line.
- ECB (EUR), Bank of England (GBP), Bank of Japan (JPY), Bank of Canada (CAD): 2% inflation.
- Swiss National Bank (CHF): price stability, which it defines as inflation below 2%.
- Reserve Bank of Australia (AUD): 2 to 3%. Reserve Bank of New Zealand (NZD): 1 to 3%, aiming at the middle.
A bank with one target reacts most clearly to that target. A bank with two has to weigh them against each other, which makes its language worth more than its arithmetic. The markets page keeps the full list with the next meeting for each one.
The reaction function: what would change their mind
Traders talk about a bank's reaction function, which is a formal way of asking one question: what would have to happen for this bank to move sooner, or later, than the market thinks? A bank that says it needs to see several more months of falling services inflation has told you exactly which release to watch, and what a surprise in it is worth.
This is also why the market can price a cut before a single figure has changed. If the bank's own conditions are being met, the path is priced first and the decision only confirms it.
A decision has four parts
The rate is the part that makes the headline, and usually the part that was already expected. The other three carry the information.
- The statement: compare it line by line with the last one. A removed sentence, a word that moved from firm to cautious, or a new condition attached to the next step, all move the expected path.
- The vote: a decision carried by a narrow majority, or with members voting for a different move, says the next meeting is genuinely open.
- The projections and the press conference: where the bank thinks inflation, growth and its own rate will be in a year, and how the governor answers the awkward question. A governor who refuses to rule something out has usually ruled it in.
Why a hold can be hawkish
Because the decision is only one of the four parts. A bank that leaves the rate alone but raises its inflation projection, shows a split vote and drops the sentence about being patient has just told the market the next move is up. Currencies price the path, not the level, so that hold can lift the currency more than an expected rise would have.
The reverse happens just as often: a rise delivered with a heavy hint that it was the last one is read as the end of a cycle, and the currency falls on the day it got a higher rate. If that seems backwards, it is the same rule as everywhere else in macro: the surprise moves the price, not the fact. That rule is worked through in reading a release against expectations.
Guidance, and the tools next to the rate
Forward guidance is simply what a bank says about what it intends to do next, and it works because expectations move prices long before rates change. Next to the rate, banks also run their balance sheet: buying bonds to loosen conditions, or letting holdings run off to tighten them. A change in that pace matters to currencies in the same way a rate change does, more slowly and with less noise.
Two more things are worth knowing. Some banks act in the currency market itself when moves get disorderly, which can turn a one-way trend around in minutes. And a bank that is far behind or ahead of the others creates the widest gaps between currencies, which is where setups come from in the first place.
How to prepare for a meeting
- What is priced in? If the whole market expects a hold, only the tone can surprise.
- What changed since the last meeting, in the data the bank said it was watching?
- What would the statement have to say for the market to be wrong?
- Is the other currency in your pair also close to a decision? Two meetings in one week is two sources of risk.
How MacroSetup handles it
Each of the eight currencies carries a central bank card with the target, the current stance, the next meeting and what that bank is watching now, and the fundamentals pillar of the score is weighted towards exactly those figures. Meetings are flagged as event risk a day ahead on the currency and on every setup that includes it. The methodology sets out the weights, and how it works shows a week around a decision.