Site icon Aximdaily

Hawkish and Dovish: Stances of Central Banks that Affect your Trading

Hawkish and Dovish

Hawkish and dovish are common terms used specifically in financial markets to describe the central bank’s monetary policy stance. Policymakers are often portrayed as either hawkish or dovish as well according to their individual perception of monetary policy guidance. Both terms refer to different points of view on the policy path and its direct influence on the economy. 

Hawks are seen to be more concerned about keeping inflation under control, they advocate higher interest rates to restrict the money supply in the economy. Doves, on the other hand, are more focused on overall economic growth and job creation. That’s why they support lower interest rates to maintain the money supply. 

Eventually, the value of studying the market response to the release of economic reports or central bank activities can be reflected in the efficiency of the fundamental analysis. Forex traders are always trying to reach higher accuracy with their expectations of the market.

What is the Role of Central Banks?

A central bank is a financial institution that sets the monetary system for a nation. Central banks are given privileged authority to issue currency, function as the bank of the government, manage exchange reserves, regulate the credit system, oversee commercial banks and act as a lender of last resort. Central banks have a defined range of responsibilities that includes overseeing monetary policy and implementing specific tools to achieve main mandates such as currency stability, steady inflation, and full employment.

Some central banks have a single mandate which is price stability, such as the European Central Bank. Others have dual policy mandates; price stability and employment, like the Federal Reserve and Reserve Bank of New Zealand. 

Central banks determine whether to raise or cut interest rates to achieve their policy mandates which are commonly inflation stability and job growth. Higher interest rates are intended to prevent economic growth and inflation from overheating, while lower rates are adapted to stimulate the economy. 

Hawkish and dovish stances affect the monetary policy’s future path, known as forward guidance. 

What is Forward Guidance? 

Forward guidance is a communication tool used by central banks to convey the economic situation and the potential path of monetary policy. It is a very effective approach to influencing market expectations by revealing future monetary policy intentions. 

Despite the ongoing controversy about its effectiveness, forward guidance has increasingly become a key tool for modern central banking. The Federal Reserve was one of the earliest major central banks to use forward guidance in its policy statements since the early 2000s. 

However, the role of forward guidance became more significant in the wake of the financial crisis back in 2008. While banks had no other option but to be dovish as interest rates at their historical lows, it was essential to expand monetary policy influence on the market through expectations of long-term interest rates. 

Hawkish and Dovish Explained

Hawkish is seen as a positive tone, where a central bank considers tightening policy and hiking interest rates in wake of a better economic outlook. It is used normally to describe a contractionary monetary policy. Policymakers are described as hawkish when they talk about or support policy tightening by increasing interest rates or reducing stimulus. A monetary policy is seen as hawkish when a rate hike is forecasted, and when a central bank adopts a positive tone about the economic outlook. 

Phrases used in a hawkish monetary statement include strong economic growth, reducing the balance sheet, high inflation, tightening of monetary policy, and interest rate hikes.

Dovish is the total opposite. It is seen as a negative tone, as the central bank considers taking expansionary measures and cutting interest rates to fight economic downturns. A dovish statement is used when a central bank obtains a cloudy economic forecast regarding growth and inflation. Terms used in a dovish statement may include weak economic growth, increasing balance sheet, low inflation, stimulus, and interest rate cut. 

Example: Think about trading EURUSD and the U.S. economy experiencing a surge in growth with higher inflation rates, monetary policy officials will likely increase interest rates in response to this growth. This, in turn, causes the currency to strengthen as investors look for higher-yielding assets.
On the other hand, if a country's economy is experiencing a downturn and struggling with high inflation rates, central bank officials will likely implement a contractionary monetary policy in order to reduce demand for goods and services and curb inflation. In this case, the currency is likely to weaken as investors sell off their holdings due to decreased interest rates and opportunities for growth.

A clear shift in any central bank’s stance from hawkish to dovish, or vice versa, tends to influence the currency directly. For example, the currency appreciates against other currencies if the central bank conveys a positive outlook after stating that the economy needs stimulus. Conversely when a bank refers that the economy is slowing down and inflation is decreasing, hinting at a possible rate cut and applying stimulatory measures. That’s how hawkish and dovish policy views affect the value of currency differently. Read more on currency appreciation and depreciation.

Hawkish and Dovish Stances


Hawkish Dovish
Currency Appreciation Depreciation
Interest Rate Increases Decreases 
Monetary Policy Contractionary Expansionary 
Objective Contain inflation & growth Stimulate inflation & growth 

What are the Types of Monetary Policy?

Monetary policies are used by governments in order to achieve goals related to economic growth, inflation, and unemployment. Each type of policy is aimed at achieving different targets across various time frames. Here we look at the two main types of monetary policy and how they are utilized by central banks around the world.

To achieve their policy mandates, central banks use monetary tools, mainly interest rates, to achieve stable inflation, growth, and money supply in the economy.

Traditional Monetary Policy

Traditional monetary policy is used to influence the economy using a combination of interest rates and credit. The most prominent tool that is used by the government in order to influence traditional monetary policy is known as an overnight rate. This refers to the amount that banks are charged for borrowing money on a short-term basis from other institutions.

The central bank can alter the overnight rate by changing the amount that banks are required to pay when they borrow money. When this happens, it becomes more expensive for banks to obtain additional loans. This reduces their potential for increased lending and investing, which in turn impacts how consumers spend their money as well as how companies obtain financing during periods of growth.

Quantitative Easing

Quantitative easing is a type of monetary policy that is used to influence the economy by increasing the cash flow into financial markets. This can be done in a number of ways, such as purchasing government bonds or other assets from banks and insurance agencies, which then increases their cash reserves. In addition to purchasing these assets, the central bank can also buy or sell forex reserves to increase its overall cash flow.

Quantitative easing is most often implemented when traditional monetary policy fails to have the desired results in supporting economic growth and achieving other targets. This type of monetary policy can lead to a higher rate of inflation, which means that the cost of goods and services will increase. If quantitative easing continues for a long period of time, it can also cause currency values to drop as the central bank injects additional liquidity into financial markets.

By understanding both types of monetary policy and how they can influence each other, forex traders can be in a better position to take advantage of periods of economic growth and inflation. Whether you are trading during an upswing in the economy or a downtrend, take note of monetary policy decisions and how they can impact your trading strategies. By staying informed about these key economic factors, you can maximize your profits when you invest online!

What is The Role of Interest Rates? 

Central Banks tend to raise interest rates to curb high inflation and an overheating economy. This is because high-interest rates mean people and businesses will borrow and spend less. These policies aim to prevent the economy from growing too fast which can create economic bubbles.

On the contrary, when an economy is shrinking, interest rates are lowered as the central bank wants people to borrow and spend more. Lower interest rates encourage more people to borrow and spend, therefore stimulating the economy. When the central bank considers lowering interest rates, it means that the economy is not doing well which leads traders to sell that currency. And when lowering the interest rate isn’t efficient enough to revive the economy, the central bank may start quantitative easing.

In the forex market, currencies benefit from higher interest rates against lower-yielding currencies. As interest rates go up, interest in the currency follows. Same to any market, investors look for higher returns and the best economy to invest their money. Here the big effect of interest rate differentials steps in. The higher a country’s interest rate is, the more likely its currency will get stronger. In contrast to currencies with lower interest rates, they are more likely to weaken in the longer term.

Bottom Line 

A dovish monetary policy stance aims to stimulate economic growth and employment, typically by cutting interest rates and sometimes signaling the possibility of further reductions. On the other hand, being hawkish means tightening policy by increasing the interest rate and/or reducing or exiting any monetary expansion. Market investors usually watch for hawkish and dovish signals from central banks and policymakers in order to anticipate future market direction.

Hawkish and dovish stances have a direct impact on market sentiment. Hawkish stance is often seen as a bullish factor that helps the currency to appreciate, while dovish is bearish as it implies lower rates and weak economic activity. Know more about Bullish and Bearish Markets.


Trading News and Analysis

As a forex trader, it is critical to frequently monitor the market news and conduct analysis. While some traders may be tempted by the ease of relying on forex signals and trends, taking in-depth knowledge about the financial markets offers invaluable skills for more successful predictions. Even if you do not want to spend time doing the fundamental analysis yourself, understanding how it works will give you an advantage over those who rely solely on technical indicators alone.

Our team of market analysts offers an in-depth look at the major currency pairs and key economic events each week with a market outlook release. Follow our forex news to access leading news feeds, giving you a competitive edge when trading online. Leverage our extensive experience with foreign exchange markets to get ahead of changes and maximize your profits! Join the best forex platform today and start exploring the world’s top currencies.

To develop their forex knowledge and trading strategies, AximTrade offers experienced traders a number of valuable resources. As one of the leading brokers in the industry, they provide top-notch technology with their advanced Copy Trade platform packed with efficient features. Additionally, you can count on reliable trading conditions along with some of the best forex accounts available and flexible leverage options to cater to your needs.


Exit mobile version