What is Dovish and Hawkish in Forex? These are the explanations and differences
Beginner traders may still be unfamiliar with the two terms above and are confused about what dovish and hawkish mean. Both of these terms are closely related to each other and need to be well understood by traders.
In this discussion we will explain to you all about the complete Dovish and Hawkish terms.
Let’s look at the explanation below.
What is Dovish?
Dovish is a word derived from the English word dove , meaning dove in Indonesian. If you pay attention to the nature of the dove where it will always be careful and always fly low as if afraid of heights.
The nature of the dove gives understanding to dovish, which means making decisions more carefully and not taking high risks. Dovish can also be said to be a way for a person to see the conditions that exist in the economy and are often used in decision making by the Central Bank regarding interest rates.
The Central Bank often holds important meetings to talk about economic movements and see whether they are still related to the current financial condition or not. Economic policies issued by the Central Bank will greatly affect the interest of forex traders to make transactions in buying and selling currencies.
Thus we can mean that dovish is a way of looking at the Central Bank with regard to changes in interest rates and also the perspective of traders when estimating future currency weakness.
The Central Bank will start issuing a dovish policy when they see a slowdown in economic growth and this is marked by a decline in inflation. Dovish has the nature of being prudent and not aggressive in making decisions on ongoing economic events.
An example of a case related to Dovish is what has happened to the Central Bank of Australia (RBA). Whereas at that time RBS said that the interest rate target would be at 1.75% and when they said this the interest rate was still in the range of 2.5%.
What Is Hawkish
Then there is a hawkish term whose meaning is very contrary to the above definition. Hawkish comes from the word hawk which means eagle in Indonesian.The nature of eagles is firm and always flies very high and is contrary to the nature of a dove.
So hawkish is an aggressive perspective when you are going to make decisions about an ongoing event. In its application hawkish is often used to make decisions at the Central Bank with regard to economic movements related to interest rates.
Dovish gives an indication of a decline in currencies, while hawkish leads to an increase in inflation rates. When the Central Bank sees inflation rising high, now they need to issue a hawkish argument.
When the above actions are taken, the consequences are able to reduce the inflation rate by increasing interest rates or reducing stimulus.
Examples of cases related to hawkish are when there are comments from the Fed, where they always say they will immediately increase interest rates. This hawkish comment issued by the Fed will attract people to buy USD and then be able to make the USD strengthen.
Conclusion About Dovish and Hawkish
Currency movements in the world depend heavily on economic policies carried out by the Central Bank. So it is very natural that the central banks of each country always hold meetings regularly to discuss whether economic policies are still relevant or not with the current situation. Thus, it is natural that economic policies always change over time.
When changes in economic policy, this will greatly affect the attractiveness of buying or selling the currency. This is where traders start looking for profits by predicting whether the currency will weaken or strengthen in the future.
The problem is that the meetings conducted by the Central Bank are not the same as data such as inflation or GDP which are numbers and can be read easily.Meetings held by the Central Bank are statements and they rarely mention exact figures.
Because of the above, investors and traders provide categories of statements issued by the Central Bank to Hawkish and Dovish.
With your ability to understand the interest rate policy of the currency being traded, this can increase the chances of getting a bigger profit. Although there are still other factors that will affect the rising and falling currencies, the changes in interest rates that occur are very important to understand.
The difference between hawkish and dovish is very simple and easy to distinguish. Where dovish leads to lower interest rates and has a more careful brush and will get a negative response from traders.
On the other hand hawkish leads to more positive conditions and this can be known by an increase in interest rates and will usually get a positive response from traders.
Such is the Dovish and Hawkish explanation that we can convey regarding hawkish and also dovish. Hopefully the information above can help you distinguish between the two terms.