Central Bank Intervention

Central bank intervention is direct action in the foreign exchange market by a monetary authority to influence the level of its currency or to calm disorderly trading. In practice it means buying or selling its own currency against reserves, either openly announced or conducted quietly through agent banks. Intervention can be sterilised, where the liquidity impact is offset by other operations, or unsterilised, where it also changes the money supply. Verbal intervention — officials stating that recent moves are excessive — is often used first. For traders, intervention risk means the possibility of sharp, fast reversals in a stretched pair, and it is one reason heavily managed or pegged currencies behave very differently from freely floating ones.