- Reviewed by James Stanley, Nov. 24, 2021
You have probably heard a financial news presenter say something along the lines of “The central bank governor came out slightly hawkish today after bouts of strong economic data”. The terms Hawkish and Dovish refer to whether central banks are more likely to tighten (hawkish) or accommodate (dovish) their monetary policy.[1]
Central bank policy makers determine whether to increase or decrease interest rates[2], which have significant impact on the forex market. Policy makers increase interest rates to prevent an economy from overheating (to prevent inflation from going too high) and they decrease interest rates to stimulate an economy (to prevent deflation and stimulate GDP growth).
Hawkish and dovish policies affect currency rates through a mechanism central bankers like to call “forward guidance”. This is policy makers trying to be as transparent as possible in their communications to the market about where monetary policy may be heading.
Keep reading to learn more about hawkish and dovish policies and how to apply this knowledge to your forex trades.
What does hawkish mean?
The term hawkish is used to describe contractionary monetary policy. Central bankers can be said to be hawkish if they talk about tightening monetary policy by increasing interest rates or reducing the central bank’s balance sheet. A monetary policy stance is said to be hawkish if it forecasts future interest rate increases. Central bankers can also be said to be hawkish when they are positive about the economic growth outlook and expect inflation to increase.
Currencies tend to move the most when central bankers shift tones from dovish to hawkish or vice versa. For example, if a central banker was recently dovish, stating that the economy still requires stimulus and then, in a later
