Forex Trading Fundamental Analysis 2

Question 1

What is 'quantitative easing' (QE) and what is its typical effect on a currency?

Accepted Answer

Central bank purchasing assets to inject money into the economy, which typically weakens the currency

Answer

Raising interest rates to reduce inflation, which strengthens the currency

Answer

Reducing the money supply to combat deflation, which strengthens the currency

Answer

Government fiscal stimulus through tax cuts, which strengthens the currency

Question 2

A central bank described as 'hawkish' is signaling which monetary policy tendency?

Accepted Answer

Bias toward tighter monetary policy and higher interest rates to combat inflation

Answer

Willingness to cut interest rates to stimulate economic growth

Answer

Concern about deflation and intent to increase the money supply

Answer

A neutral stance with no plans to change current rates

Question 3

What is 'forward guidance' as used by central banks in communication with forex markets?

Accepted Answer

Communication by a central bank about its likely future monetary policy intentions

Answer

Instructions to commercial banks on acceptable lending standards and limits

Answer

A forex trading strategy based on projected economic data releases

Answer

A regulatory framework for forecasting exchange rate movements

Question 4

Which institution sets the federal funds rate, the primary interest rate benchmark influencing the US dollar?

Accepted Answer

Federal Reserve (the Fed)

Answer

U.S. Treasury Department

Answer

World Bank

Answer

International Monetary Fund (IMF)

Question 5

What typically happens to a currency when its central bank adopts a 'dovish' policy stance?

Accepted Answer

The currency weakens due to expectations of lower interest rates

Answer

The currency strengthens due to increased investor confidence in economic recovery

Answer

The currency becomes more volatile but maintains its overall value

Answer

The currency strengthens as higher inflation expectations attract commodity investors

Question 6

What inflation target do most major central banks, including the Federal Reserve and ECB, aim for?

Accepted Answer

Approximately 2% annually to balance growth with price stability

Answer

Exactly 0% to eliminate inflation entirely and maximize purchasing power

Answer

As high as possible to maximize economic growth and employment

Answer

Exactly matching the inflation rate of their largest trading partner

Question 7

When the European Central Bank (ECB) unexpectedly cuts interest rates, what typically happens to the EUR/USD pair?

Accepted Answer

EUR/USD falls as lower European rates make the euro less attractive to hold

Answer

EUR/USD rises as lower rates stimulate European economic growth immediately

Answer

EUR/USD remains flat since markets had already anticipated the cut

Answer

EUR/USD rises as US investors shift capital to European bonds for diversification