The foreign exchange market is the largest financial industry worldwide, with over $7.5 trillion in daily trading volumes. Unlike stock markets, the OTC market in forex is not centralized. Hence, it's not controlled by any single entity but is organized by a network of participants with different motives, means, and intentions.

Who oversees controlling the forex market? To answer this, it is necessary to identify the main drivers of liquidity, exchange rates, and market evolution. If you're exploring short-term trading strategies, understanding what is forex day trading can help you navigate this dynamic market effectively.

1.        Central Banks

Monetary policy sets the foundation for exchange rates, and central banks are at their core in the influence of the forex market. Inflation is managed by institutions like the U.S.  Federal Reserve, the European Central Bank (ECB), and the Bank of Japan, who also have authority over currency manipulation and setting interest rates.

These rate hikes or reductions by a central bank impact the demand for monetary goods. Foreign capital is attracted to higher rates, resulting in stronger currency, while lower levels reduce its attractiveness. Central banks may intervene by purchasing or selling their own currency to stabilize fluctuations or achieve economic goals. Historically, the Bank of Japan has intervened to undermine the yen's ability to compete with exports.

2.        Commercial Banks

Commercial banking is a significant contributor to forex, as it accounts for the majority of currency transactions. Large financial institutions such as JPMorgan Chase, Citibank, and Deutsche Bank operate sophisticated forex trading desks that handle orders for clients and engage in proprietary trading. The benchmark exchange rates influence both businesses and individual traders in the interbank market, where banks trade currencies among themselves.

By offering bid and ask prices for various currency pairs, these banks function as market makers to maintain liquidity.

3.        Institutional Investors & Hedge Funds

Institutional investors and hedge funds are involved in the forex market, adding some speculation. The enterprises handle significant sums of money and frequently collaborate based on economic patterns, central banking strategies or geopolitical events. In high-frequency and algorithmic trading, hedge funds take advantage of small market price differences. Some funds engage in carry trades, borrow from low-interest-rate currencies like the Japanese yen, and invest in higher-yielding currencies such as Australia's dollar, which affects their supply/demand relationship.

The actions of hedge funds can be powerful, particularly when several companies hold similar positions and market shifts can occur. In 1992, George Soros' short position against the British pound led to the UK exiting the European Exchange Rate Mechanism (ERM) and incurring significant costs for the Bank of England.

4.        Multinational Corporations

Large multinational corporations (MNCs) also significantly contribute to the forex market. Companies with global operations, such as Apple, Toyota, and Nestlé, regularly convert currencies to manage overseas revenue and expenses. By utilizing forward contracts and options, these firms can avoid currency risk while keeping their profits steady in exchange rate swings.

Their forex activities are more speculative, but their sheer volume of transactions helps maintain market liquidity and long-term trends. An increase in demand for Chinese products may cause the Chinese yuan to remain valued, leading to changes in global trade patterns.

5.        Retail Traders

The forex market is thriving, with retail traders taking advantage of online trading platforms and greater leverage. Even though individual traders operate at a much smaller scale than banks or hedge funds, their collective activity can still have an effect on short-term price movements. Technical analysis, trading strategies like scalping and day trading, and algorithmic trading tools are commonly used by retail traders to capitalize on market volatility.

The availability of platforms for retail traders has increased market liquidity. This is a positive development. Nevertheless, retail traders are not equipped with the financial means and knowledge of institutional investors, which makes them more susceptible to being informed about news events and market sentiment.

Who has authority over the Forex market?

The forex market is self-regulating and decentralized, unlike the stock markets that rely on exchanges and regulatory bodies for oversight. However, control is shared among multiple entities:

·        The basis for monetary policies is established by central banks.

·        Commercial Banks are responsible for liquidity and trading activities.;

·        Institutional Investors are responsible for generating speculative momentum and impacting trends.

·        Corporations hedge against changes in fundamental demand and supply.

·        Retail Traders emphasize short-term volatility.

There is no one entity that controls the market, but a combination of policy decisions, speculative thinking, and macroeconomic factors determines its direction.

Conclusion

The forex market is a vast, interdependent network where various players interact to impact currency values. Although central banks are highly influential, they don't dictate market behaviour in isolation. Instead, the forex environment is shaped by banks, institutions, corporations, and retail traders.

The knowledge of these forces is essential for traders and investors to make informed decisions. Despite the inability to predict forex movements, having knowledge of who is moving the market can help navigate its complexity.