Currency prices can change a great deal based on the monetary policies of the country in question. It may come as no surprise then that there are different terms used to describe the various policy decisions that are made by central banks and others.
The two primary types of terms that you will tend to hear about are dovish and hawkish.
Central banks operate under a leader known as a chairman. He or she is the voice of the agency and has a vote in some of the important policy decisions that are made. The current chairman of the Federal Reserve in the United States is Jerome Powell.
When he steps in front of cameras to give a speech of some kind, you can bet that he is about to make some news that will move markets. When you see that he is scheduled to give a speech, you should try to make sure you are around to receive the news that the Fed is about to put out.
Even better, you should try to put yourself in front of a monitor and prepare to trade according to the news that comes out. Not all central bank officials carry the same weight in the market as some others. You can certainly bet that someone like Jerome Powell will get plenty of coverage when he steps up to give a speech.
However, someone who is not as well known within the organization will likely not receive the same press coverage that Powell does. This is because the Federal Reserve seeks to speak with one voice, and offering too many varying opinions may confuse the public.
Speeches given by Chairman Powell are very likely to carry a specific weight to them — both in the public’s view of the markets and in the way that the markets adapt to the words that are spoken. Ideally, you should take what he has to say with a lot of seriousness.
There are a lot of reasons why Powell may give a speech. It could be anything from a change in interest rates (a big impact on the market) to an outlook on the state of the economy (moderate impact).
Regardless, it is best to take the information in and consider it when thinking about the various options that you will want to take into consideration when placing your trades in the market.
Hawkish vs. Dovish Central Banks
There are different types of policies that central banks may take in terms of interest rates and other economic factors that they have some control over. When you know what the central bank is doing, it is possible that you may be able to adapt your strategy to the way that they are operating so you can trade according.
What Does Hawkish Mean?
The hawkish central bank is a bank that is tightening up monetary policy. This likely means that the bank is going to increase interest rates in order to restrict the money supply and make it more expensive to borrow. This is done in a bid to try to cool inflation as much as possible. Banks that do this often do so because they feel that inflation has become overheated and they need to step in so as to cool off the overheated economy before inflation gets out of control.
What Does Dovish Mean?
This is the mirror opposite of a hawkish central bank. This is when monetary policy is loosened to encourage more borrowing. Loosened economic policies make it less expensive to borrow, and these policies can fuel economic growth.
However, they can also cause inflation to begin to take root throughout the economy. It is certainly a balancing act that the central banks have to be very mindful of.
Here’s a quick primer on the difference between hawkish and dovish policies:
If you know what you are looking for when it comes to central bank speeches, you may begin to identify if a central bank is loosening or tightening policies based simply on the words spoken by their leadership. Take this into account when you are trading.
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