How Central Banks Affects the Forex Market?

Probably the most influential factor on a currency's value is the policy set by a country's central bank. Its objective is to influence domestic rates, which in turn influence overall economic activity. Lower interest rates generally stimulate borrowing, investment and consumption, while higher interest rates reduce borrowing and consumption.

Currency intervention entails a central bank buying or selling its own currency to adjust the exchange rate. This is a way to control inflation and demand for imports and exports, and it also assures exchange-rate stability. This intervention means different things to different types of traders:

For short-term traders, intervention might mean large intraday moves, sometimes to the tune of 150 - 200 pips in a matter of minutes.
For medium/long term traders, intervention might signal a change of trend if the bank is shifting its stance and sending a different message to the market.

Central Bank’s Monetary Policy and the FX Market

The monetary policy that central banks adopt falls in two big categories: expansionary or restrictive.

Expansionary monetary policy -

also known as accommodative, it is aimed at stimulating economic growth, by means of lowering interest rates. Another measure is the increase in money supply, which achieves the lowering of borrowing costs.

Restrictive monetary policy -

aimed at slowing economic growth/fighting inflation by rising interest rates. This policy is also known as "tightening" and is applied at times when the economy is expanding too rapidly. With too much money chasing too few goods, prices begin to rise, and central banks now have to stave off the rising inflation.
With regards to the specifics of interventions, there are two kinds of foreign exchange interventions: sterilized and unsterilized.

Sterilized intervention -

This will not have an impact on the money supply. It is "sterilized" because, aside from outright buying or selling of the currency, it also involves an additional step: a sale of government securities that offsets the reserve addition that occurs due to the intervention. The impact of such a move is usually short to medium-term.

Unsterilized intervention -

This type of intervention refers to buying or selling the national currency against a foreign currency. The impact can be seen at all levels of the economy, aside from the one seen in the foreign exchange market. As a consequence, other adjustments must be made (in interest rates, in prices etc.). This kind of intervention has a long-term effect.

Why Forex Traders Pay Attention to the Heads of Central Banks?

Not only the central banks themselves have an impact on the Forex market, but also the heads of the central banks. Such as the head of central banks of the US, China, Europe and Japan, these people have a major impact on the direction of currencies. To make it easy for you, we have listed below the main central bankers:

Mario Draghi - European Central Bank
Mark Carney - Governor of the Bank of England
Jerome Powell - Chairman of the Federal Reserve Board, United States
Haruhiko Kuroda - Governor of the Bank of Japan
Philip Lowe - Governor of the Reserve Bank of Australia
Stephen S. Poloz - Governor of the Bank of Canada

The Forex market participants pay close attention to their language and hints. Especially, when these head of central banks deliver speeches, give interviews or provide information publicly.