Hawkish vs Dovish
We recently discovered that changes in a country’s interest rates have a significant impact on currency pricing.
We now understand that interest rates are ultimately influenced by a central bank’s opinion on the economy and price stability, both of which influence monetary policy.
Central banks, like most other enterprises, have a leader, such as a president or chairman.
It is that individual’s responsibility to be the central bank’s voice, communicating to the market the direction of monetary policy. And, just like when Jeff Bezos or Warren Buffett take the stage, everyone pays attention.
So, applying the Pythagorean Theorem (a2 + b2 = c2), wouldn’t it make sense to keep a watch on what those central bankers say?
Yes, according to the complex conjugate root theorem!
Yes, knowing what’s coming up in terms of prospective monetary policy adjustments is critical. And, fortunately for you, central banks are becoming more adept at communicating with the market.
What matters is whether you genuinely grasp what they’re saying.
So, the next time Jerome Powell or Christine Lagarde give a speech, pay attention. Better still, use the dependable forexinvestindo.com Economic Calendar to prepare for the speech.
While the head of a central bank is not the only person making monetary policy decisions for a country (or region), what he or she says is not just not ignored, but respected as if it were the gospel.
Okay, so that was a little dramatic, but you get the idea.
Not all central bank officials are equally important.
Central bank speeches have a tendency to elicit a market reaction, so look for swift movement following an announcement.
Adjustments (increases, decreases, or holds) in current interest rates, comments about economic growth metrics and outlook, and monetary policy announcements explaining current and future changes can all be included in speeches.
But don’t worry if you can’t see the live event. As soon as the speech or announcement is broadcast, news organizations around the world make the information available to the public.
Currency analysts and traders both take the news and try to decipher the overall tone and phrasing of the statement, taking extra attention when interest rate adjustments or economic growth data are included.
Forex traders respond more to central bank activities and interest rate adjustments when they do not match existing market expectations, similar to how the market reacts to the release of other economic data or indicators.
Because central banks are becoming more transparent, it is becoming easier to predict how monetary policy will evolve over time.
However, there is always the risk that central bankers would alter their outlook to a greater or smaller extent than projected.
During these periods, market VOLATILITY is high, and current and new trade positions should be handled with caution!
Hawkish vs. Dovish Central Banks
We really really meant hawks versus doves, namely central bank hawks versus central bank doves.
Depending on how they tackle specific economic situations, central bankers can be considered as either hawkish or dovish.
What does it mean to be ‘hawkish’?
When central bankers are regarded as “hawkish,” they support hiking interest rates to combat inflation, even if it means undermining economic growth and employment.
They are referred to as “hawks,” and phrases such as “tighten” and “heating up” will be employed.
“The Bank of England suggests the existence of a threat of rising inflation,” for example.
The Bank of England may be labeled as hawkish if it issued an official statement indicating a preference for raising interest rates to combat high inflation.
What does it mean to be “dovish’?
Central bankers, on the other hand, are referred to as “dovish” when they prefer economic growth and employment over tightening interest rates.
They also have a more non-aggressive position or viewpoint on a certain economic event or action.
They are referred to as “doves,” and phrases such as “soften” and “cooling down” will be used.
What does hawkish and dovish mean?
|Objective||Decrease inflation||Stimulate economy|
|Monetary Policy Stance||Contractionary / Tighten||Expansionary / Loosen|
|Current Economic Growth||Strong||Weak|
|Current Inflation||Inflation increasing||Inflation decreasing or negative|
|Interest Rate||Increase (“Hike”)||Decrease (“Cut”)|
|Currency Effect||Currency appreciates||Currency depreciates|
Next Lesson: Fundamental Factors That Affect Currency Values