The impact of central bank speeches cannot be overestimated in terms of their effect on the financial markets, and none more so than in the fixed income markets. This is because bond prices (and therefore the prices of bond futures) depend on the future path of interest rates. Therefore, with central banks being the only institutions with the power to do this, speeches from key central bankers are often delivered with the intention of indicating to the market what that path might be.

For this reason, numerous academic studies have shown that market reactions are often more pronounced in central bank statements made immediately after interest rate changes than when the interest rate is changed. This serves to underline the importance of understanding central bank speeches, which often generate highly profitable trading opportunities for very little risk for those traders who can quickly and accurately decipher these often-complex communications.

One of the ways in which traders do this is by listening out for certain phrases which indicate new information, such as a central bank beginning to change its outlook or policies. This could be indicated by a sudden shift in emphasis from combating inflation to fighting lower aggregate demand in the overall economy for example, or may be as subtle as the inclusion of a single word such as ‘very’ or ‘extremely’ at certain key points of speeches.

Although central banks have less direct influence on the economy via interest rates than they used to, this has increased the importance of central bank communications since they represent another channel for these institutions to manage economic activity and the expectations of the financial markets. However, for traders to take advantage, it is crucial for them to have a firm grasp of previous central bank policy and developments to realize if major changes have taken place.

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