The meaning of the term hawkish is especially important to Forex traders, as it is critical to understanding the trends and developments in currency markets. The moniker is derived from the predatory and unsympathetic nature of the hawk bird and is often used as a metaphor to describe the sentiment of a C entral Bank. Monetary policy is all about altering interest definition and the money supply to influence economic activity.
When a Central Bank is hawkish definition, it is less concerned with economic growth and more concerned with inflationary pressures hawkish the economy. This simply means that the economy is heating up and the Central Bank would like things to slow down a little. A simple way to remember what hawkish means is to consider the following hawkish and dovish concept: Hawks fly higher than doves and therefore hawkish sentiment corresponds to a Central Bank that is looking to push interest rates up.
In contrast, doves fly a lot lower than hawks. A real-world example of a hawkish stance was taken recently by the Reserve Bank of New Zealand RBNZ when they ruled out further interest rate cuts and provided forward guidance for raising interest rates to prevent unwanted inflationary pressures in the economy.
Furthermore, the most hawkish central bank at present is the US Federal Reserve, which is set to deliver further rate increases in What does this mean for their currency the U. As interest rates are raised, savers can now earn more in interest so overseas savers have a strong incentive to move their money into U.
This increases demand for the currency, causing it to appreciate. Federal Reserve and then identify a Central Bank that is dovish e. One key thing to be aware of is whether or not markets have priced in the expected future path of monetary policy.
The element of surprise can be a useful tool for Central Banks as their policy announcements may have little effect if hawkish have already been expected by the market at large.
So as a Forex trader, it helps to anticipate the market expectations of future Central Bank sentiment. The question to ask is: If traders have not fully priced it in, then there exists a trading opportunity for you to capitalise on.
For example, when the RBNZ made the announcement that forex rates would not go any lower, this caught many Forex traders by surprise. This unanticipated switch to a hawkish stance from a dovish one caught people off guard, forex the New Zealand Dollar appreciate sharply following the announcement.
If this had been anticipated beforehand, the news would have had little immediate hawkish on the value of the New Zealand Dollar. If you have any questions please leave a comment below. Also, please share the article if you liked it!
I'm Jai, chief editor at Forex System Profits. Feel free to copy and modify any of the trading systems you find here.
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