How do central bank policies impact forex and stock markets?

Central bank policies impact forex and stock markets by influencing interest rates, liquidity, and investor confidence. When central banks change interest rates, they affect currency values and stock prices. A lower interest rate makes borrowing cheaper, boosting stock markets but weakening the currency. A higher interest rate strengthens the currency but can slow stock market growth.

1. How Do Interest Rate Changes Impact Forex and Stock Markets?

Interest rate decisions by central banks like the RBI and the US Federal Reserve affect both markets:

• Forex Market: Higher interest rates attract foreign investment, increasing demand for the currency and making it stronger. Lower rates reduce currency demand, weakening its value.
• Stock Market: Lower interest rates encourage businesses and consumers to borrow and spend, boosting stock prices. Higher rates slow economic growth, leading to lower stock prices.

2. Liquidity and Its Effect on Stock and Forex Markets

Central banks control liquidity by adjusting money supply:

• More liquidity: Increases stock market investments and weakens the currency as more money circulates.
• Less liquidity: Strengthens the currency but can cause stock markets to fall due to reduced investment.

3. Inflation Control and Its Market Impact

Inflation affects both forex and stock markets:

• Forex Market: High inflation weakens a currency as purchasing power declines.
• Stock Market: Controlled inflation supports economic stability and stock market growth.

4. Conclusion

Central bank policies influence forex and stock markets through interest rates, liquidity control, and inflation management. Understanding these policies helps traders and investors make informed decisions.