Every country has one "chief manager of money." The most important banks: FED (USA), ECB (Europe), BOE (UK), BOJ (Japan), BOC (Canada), RBA (Australia).

What do these banks do?

If a country is a car, the central bank is the driver. They decide whether there's too much or too little money in the market, and whether to raise or cut rates. Their decisions rest on economic data: inflation, unemployment, GDP, CPI, PPI, PMI.

Interest rates — the king of forex

Rates are the king of the market. When everyone has lots of money and buys heavily, inflation rises — so the central bank raises rates to calm it. When the economy is weak and unemployment is high, it cuts rates to encourage spending.

Capital flow — the most important part

Imagine the US pays 5% while Japan pays 0.25%. If you had $10 million, where would you put it? The US! So investors buy dollars. Money always flows to where the yield and safety are best. The forex market moves largely on this principle.

Why do gold and Bitcoin fall?

Gold and Bitcoin pay no bank interest. When rates rise to 5%, people sell gold and Bitcoin and buy dollars or bonds.

What are bonds?

You lend the government $1,000, and next year it returns $1,050. If a bond pays a risk-free 5%, most investors choose the bond over gold.

Two magic words

  • Hawkish: "Inflation is dangerous, rates stay high." → dollar up, gold/Bitcoin/stocks down.
  • Dovish: "Inflation is under control, we'll cut rates." → dollar down, gold/Bitcoin/stocks up.

Map for your mind

Inflation up → central bank intervenes → rates up → capital flows to the dollar → dollar strong → gold, Bitcoin, and stocks fall.

Next up, Lesson 3: how to read economic news.