Dovish Vs Hawkish Monetary Policy

Dovish Vs Hawkish Monetary Policy

Central banks are responsible for implementing monetary policies that manage inflation while promoting employment.

Dovish refers to a lawmaker or policy that aims to stimulate economic growth by increasing the supply of money (usually achieved by lowering interest rates).

Hawkish refers to a lawmaker or policy that aims to limit inflation by decreasing the supply of money (usually achieved by hiking interest rates).

That might be a lot to take in if you are new to the market. Let’s break everything down:

  • What is monetary policy?
  • Dovish and doves in markets.
  • Hawkish and hawks in markets.
  • How does monetary policy affect Forex?

What is monetary policy?

Monetary policy is any action taken by a region’s central bank to regulate the supply of money and maintain economic growth.

The objective is to manage inflation, promote employment, and regulate currency prices.

Some of the tools used by central banks include adjusting interest rates, quantitative easing (QE), and QE tapering.

Dovish and doves in markets

Any policy that aims to promote economic growth is dovish, including lowering interest rates and quantitative easing.

How does it work?

  • Lower interest rates encourage borrowing and spending because it is less expensive for consumers to buy goods and services.
  • Increased money supply and more spending encourage businesses to hire and grow, reducing unemployment.
  • The cycle of borrowing, spending, and hiring all promote economic growth.

 

When policymakers talk about fueling economic growth by reducing interest rates or increasing QE, they are called a dove.

Hawkish and hawks in markets

Any policy that aims to decrease inflation is hawkish, including hiking interest rates and QE tapering.

How does it work?

  • Higher interest rates make it less likely for consumers and businesses to borrow and spend money.
  • Less consumption leads to a decrease in prices. Businesses will also hire less, or retrench workers to reduce costs, which stops wage growth.
  • The cycle of less borrowing, reduced spending, and unemployment lead to lower prices.

 

When a policymaker talks about stopping inflation, by increasing interest rates or QE tapering, they are called a hawk.

How does monetary policy affect Forex?

Dovish policies mean lower interest rates, which is bearish for a currency. If a central bank takes a dovish stance, you may want to sell the relevant currency.

Hawkish policies mean higher interest rates, which is bullish for a currency. If a central bank takes a hawkish stance, you may want to buy the relevant currency.

Conclusion

Pay attention during the next major central bank announcement and ask yourself these questions

  • What policy is being implemented or maintained?
  • Is it dovish or hawkish?
  • How will it affect my trades?

 

Once you do this a few times, you will have a firm grasp of the market’s fundamentals.

May the market be with you.

Dovish Vs Hawkish FAQ

Dovish refers to a lawmaker or policy that aims to stimulate economic growth by increasing the supply of money (usually achieved by lowering interest rates). Dovish policy is typically bearish for a currency.

Hawkish refers to a lawmaker or policy that aims to limit inflation by decreasing the supply of money (usually achieved by hiking interest rates). Hawkish policy is generally bullish for a currency.

Monetary policy is any action taken by a region’s central bank to regulate the supply of money and maintain economic growth. The objective is to manage inflation, promote employment, and regulate currency prices.

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Guy Seynaeve

Guy Seynaeve

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