European Central Bank

The European Central Bank (ECB) represents the central banking entity in the Eurozone that oversees monetary policy for the bloc.

As a growing geographic and economic region, the eurozone now includes 19 countries, which rely on the euro as their national currency.

The eurozone presently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

In terms of monetary policy, the ECB and the national central banks together constitute the Eurosystem, which reflect the central banking system of the euro area.

The ECB’s primary function is to maintain price stability in the eurozone and to preserve the purchasing power of the euro.

Founded in 1998, the ECB is also responsible for providing both safety and stability of the banking system and financial system within the EU region and within each member country.

Furthermore, the ECB was also given a mandate to oversee the conduct of forex operations. This includes dealing with the holdings and management of the official foreign reserves of the euro area countries.

How Does the European Central Bank Affect Forex?

The ECB’s policies can have a substantial effect on the value of the euro, most notably through changes in interest rate expectations.

As a broad-based example, when interest rates expectations rise, currencies tend to appreciate. When interest rates expectations fall, currencies tend to depreciate.

For example, if the ECB keeps interest rates unchanged, but issues forward guidance that they may raise interest rates in the future, the value of the euro likely appreciates.

The ECB primarily lowers interest rates when it is trying to stimulate the economy.