Forward guidance

Forward Guidance

Forward Guidance

Forward guidance is a concept that was adopted by some of the world’s most influential central banks just a few years ago, so it seems like a good idea to discuss it a bit and inform you if you’re not already familiar with it. This is essentially a form of fundamental analysis that was designed with the intention to bring the volatility of financial markets down. Some traders believe it has had a completely opposite effect, but we will talk about that later in the article. The concept is actually pretty simple and even beginners will quickly understand what it represents. Therefore, let’s get started and show you what you need to know. Read on!

Forward Guidance | Definition

So, what is forward guidance? Well, it’s a measure whose goal is, apart from reducing volatility, to increase the transparency of the way Central Banks conduct business. US Federal Reserve was the first one to introduce this measure by publishing its projections for the upcoming period. Today, banks like the Bank of England and the European Central Bank also hold press conferences after they make decisions regarding their interest rates. This is what forward guidance today actually is – a way for banks to harmonize and allow everyone on the market to come to a conclusion more easily. But is the idea actually working and how does all of this affect the market? Stay with us and find out!

Forward Guidance | Does it work?

At first glance, it would seem that forward guidance can do a lot to help traders decide whether to take a bearish or a bullish stance. After all, interest rates are probably the most important factor when it comes to currencies’ behaviour, so getting extra info from various authorities can’t hurt, right? Ideally, yes, but what if the explanations and predictions regarding interest rates keep changing? What if some unexpected Big Market Event happens? This is not a very rare occurrence and when it happens it actually increases market volatility. Naturally, if the ECB, for example, one week gives you a certain prediction and changes it completely during the next press conference, traders will react, too. Therefore, everything essentially boils down to fundamental analysis and how well you can use it. In short, forward guidance can be helpful when trading currencies, but you always have to take things banks say with a grain of salt.

Forward Guidance | Conclusion

It is easy to see why forward guidance is a subspecies of the fundamental analysis. The data you get from central banks have a huge impact on the market conditions, but they can often change relatively quickly. Therefore, you should keep track of what’s going on in the world of binary options and always analyze these press conferences critically. And if you don’t think you’re up to the task, don’t worry – other articles on this website will prepare you for everything you can encounter while trading. 

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Author: Ben Prescott
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