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Central banks play a crucial role in forex trading by influencing currency values and maintaining economic stability. Here are some key functions they perform:

  1. Monetary Policy: Central banks set interest rates and control money supply, which directly impacts currency value. Higher interest rates typically strengthen a currency, while lower rates can weaken it.
  2. Intervention: Central banks may intervene in the forex market to stabilize or influence their currency’s value. This can involve buying or selling their own currency in the market.
  3. Foreign Exchange Reserves: Central banks hold foreign exchange reserves to manage their currency’s value and respond to economic fluctuations. These reserves can be used to support the national currency during times of volatility.
  4. Economic Data Release: Central banks regularly release economic reports and forecasts that traders closely monitor. These announcements can significantly impact market sentiment and currency prices.
  5. Guidance and Communication: Central banks provide guidance on future monetary policy, which can influence trader expectations and market behavior. Clear communication helps reduce uncertainty in the forex market.

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