What is hawkish is an important concept in the forex market. However, effectively applying this knowledge to trading requires wisdom and experience. Although traders can use information about monetary policies to make investment decisions. But they also need to consider other factors such as the overall economic situation and the latest market news. find out with Forex Trading what is hawkish, as well as how the Fed’s monetary policy can affect your investment decisions.
The role of the US Central Bank FED
As you know, the monetary policy of the United States Central Bank (FED) is always a hot spot of widespread concern. Because of the direct impact on the value of the US Dollar. Often, traders and analysts will try to predict Fed policies before they are announced.
The core role of the FED is to create and maintain monetary stability for the country. This is especially important for countries with central banks independent of the Government. This role requires them to maintain stable levels of inflation to keep their currency’s exchange rate from depreciating against other countries.
Typically, Central Banks use three types of tools to implement monetary policy, including:
- Set bank interest rates.
- Open market operations (usually related to short-term buying and selling of Government bonds).
- Establish regulations on required reserves owned by non-governmental banks.
Among these tools, bank interest rates are one of the most important factors that traders care about. These assessments and forecasts are important because they can steer monetary policy in a Hawkish or Dovish direction.
See more: Learn Dow theory for trading beginners
What is the difference between Dovish and the hawkish model?
Let’s learn about Dovish and what is hawkish and distinguish between the two policies through the following content:
what is hawkish?
The term what is hawkish? That is not simply the name of the hawk in English. It’s also an economic term that refers to the monetary policy that Fed officials implement. When the FED applies this policy, it usually increases interest rates. To control inflation and increase the value of the national currency.
“hawkish” policies are often implemented when a country’s economy grows too quickly. Leading to high inflation due to the large amount of money in circulation. Therefore, the FED needs to increase interest rates to slow down economic growth and curb inflation.
Why does raising interest rates slow down the economy? That’s because when the Forex Hawkish model is applied, interest rates at commercial banks will increase. Including loan interest rates and deposit interest rates. This makes people and businesses tend to save more and reduce borrowing to invest. As a result, the economic growth rate decreases, along with the level of inflation.
What is the Dovish Forex Pattern?
How does the Dovish Forex model contrast with the What is Hawkish policy?? Dovish leaders of the Fed favor a more flexible monetary policy. Instead of raising interest rates, they often reduce interest rates. Stimulates the economy, although it may reduce the value of the local currency.
When the Dovish policy was implemented, Central Bank interest rates fell. Leading to a reduction in interest rates at other commercial banks (including loan interest rates and savings interest rates). At that time, people and businesses will not spend much money on savings. Instead, they will increase borrowing to invest and expand production. This will promote the use of money and create more jobs, promoting economic growth.
When we talk about pigeons, we often think of the image of a white bird flying freely. Filled with a sense of freedom and optimism. Therefore, the Central Bank’s loose monetary policy also bears its name after this beautiful image. It describes a free, comfortable, and vibrant economy. This loosening policy is considered a moderate policy. Similar to the symbol of the dove, the bird symbolizes peace.
Compare Forex Hawkish and Dovish patterns
Based on the above analysis, we can see that the two Forex models Hawkish and Dovish represent two completely opposing economic philosophies of Central Bank leaders. Therefore, there exist many important differences between them. Let’s explore the table below to find the difference between Dovish and what is hawkish
| Hawkish Policy | Dovish Policy | |
| Current state of the economy | Growing too fast | Stagnant growth |
| The current state of inflation | High inflation | Low inflation |
| Policy of type | Tighten | Easing |
| Target | Reduce inflation rate | Boost the economy |
| Impact on interest rates | Interest rates increase | Interest rates decrease |
| Impact on the economic balance sheet | Reduce | Extend |
| Impact on local currency | The value of the local currency increases | The value of the local currency decreases |
After understanding the meaning of Dovish and what is hawkish, we will proceed to analyze how these two monetary policies affect the forex trading market.
Impact of what is hawkish policy
It can be seen that the policies of leading Central Banks in the world not only affect the value of domestic currencies but also impact the global foreign exchange market.
When the FED deploys and implements a tightening monetary policy (Hawkish). This is similar to causing interest rates to increase. Reality shows that money often flows into markets with higher interest rates. Therefore, when interest rates in the United States increase, investors often move their capital here to seek profits. This leads to an increase in the value of the USD, as demand for the US Dollar also increases.
On the other hand, to better understand the impact of what is hawkish policy, we see that the FED often reduces assets in its balance sheet fund by selling bonds and mortgage-backed securities. Selling these assets will reduce the amount of money in circulation. This also reduces the supply of USD. Leading to an increase in the value of the USD currency.
In addition, the FED also applies Monetary Policy Guidance (Forward Guidance). Includes positive predictions about the economic situation. Emphasis on inflation control and economic growth. When the Fed releases these predictions, investors and traders often feel more secure. With the expectation that interest rates will continue to increase. This motivates them to pour capital into the USD market, increasing the value of this currency.
Technical analysis of the impact of Dovish policy on the Forex market
When the Fed implements a Dovish easing policy, interest rates usually decrease. As a result, money often flows into markets with higher interest rates. Leads to a fall in the US Dollar due to reduced demand.
To implement the Dovish easing policy, the FED often expands its balance sheet by buying bonds and mortgage-backed securities. This action leads to an increase in the amount of money in circulation and the USD money supply. Reduces the value of the USD.
Furthermore, Forward Guidance often includes statements about negative economic conditions. Like poor growth and signs of deflation. These statements make investors and traders predict that interest rates will fall. The USD will lose value.
In short, the Dovish Forex pattern often reduces the value of the US Dollar compared to other foreign currencies. Affects forex pairs containing USD. These fluctuations also impact the price of gold and other foreign exchange assets in the market. At the same time, any major fluctuations could have a widespread impact on other currency pairs and forex assets in the market.
How does the FED affect interest rates and monetary policy?
So how does the FED affect important factors such as interest rates and monetary policy? Let’s learn about technical analysis and its tools in the content below:
Technical analysis determines interest rates
During the 8 annual meetings of the FED, the Open Market Committee (FOMC) will evaluate indicators such as PPI and CPI. Make decisions about increasing, decreasing, or maintaining interest rates. Here, two clear schools will emerge: the Hawks, in favor of raising interest rates. And the doves, in favor of reducing interest rates.
When high-interest rate policies are implemented, borrowing capital becomes unattractive to people. Because there is no money to spend, consumer demand decreases, leading to more stability in the market and tighter control of inflation.
On the contrary, when low-interest rate policies are applied, borrowing money becomes more attractive. This causes people and businesses to borrow more to spend and expand production. As spending and production increase, prices will also increase. That contributes to increasing inflation.
Therefore, the Fed can not only set interest rates to a certain extent. It is also necessary to adjust interest rates wisely. To achieve a balance between the level of inflation and economic growth.
Forward Guidance – Technical analysis tool that predicts the FED’s next interest rate policy
Central Banks often hold regular meetings to resolve monetary issues. For example, the FOMC has 8 annual meetings. The European Central Bank (ECB) usually meets twice a month to discuss these issues.
After making the final decision on future monetary policy, Central Banks will hold a press conference. Communicate that decision to the public. During this press conference, they will explain the reasons for the monetary policy decision. Their expectations for the economy when policy is implemented. They will also share their assessment of the current economic situation. Along with that are predictions about economic growth, inflation, unemployment rate, and the implementation of monetary policy in the future.
All these assessments and predictions of the Central Bank are recorded in the Forward Guidance. Forward Guidance has become an important tool to help Central Banks carry out their monetary policy.
The importance of forex technical analysis using Forward Guidance
First of all, we can recognize that Forward Guidance is a useful tool. Helps investors predict bank interest rates and make accurate investment decisions. Therefore, the importance of Forward Guidance to them is undeniable.
However, Forward Guidance has faced many criticisms since its adoption by Central Banks. What the Fed forecasts is often different from their actual actions. This problem still causes headaches for investors.
Using such relative, uncertain terms gives the Fed room to vary. Even reversed his decision compared to the forecast. And it is not surprising that they have made decisions that surprised traders and investors.
After seeing the inflation assessment results increase to 8.6% annually in May. Higher than expected and surprising the market. The final decision that the FED made was to raise interest rates by 75 basis points.
This causes excitement for many investors. However, if compared to the FED’s actions, it is not too surprising.
Why does the Fed give Forward Guidance in technical analysis?
The world, especially the economy, is always in constant motion. The FED must be flexible to introduce policies appropriate to the latest economic situation. If the Fed does not use Forward Guidance, people will feel more confused. Don’t know economic information and running the economy will become more difficult. That’s why the Fed is required to use Forward Guidance to provide reliable information to the public.
Using interest rates to shape the Fed’s monetary policy is a key element of the foreign exchange market. Therefore, not only the FED but also the actions of other Central Banks need to be carefully observed. By monitoring Forward Guidance, we can predict what monetary policy will be applied. Hawkish or Dovish? How many members of the Fed are supporting Dovish and what is hawkish? These are important observation skills that you need to have to make accurate trading decisions. Even if you are a good economic analyst, this issue is very important to you.
How to effectively take advantage of Dovish and what is hawkish policies?
To do this, we first need to clearly understand the views and stances of leading Central Banks on monetary policy at the same time. Traders can find out through interest rate announcements from the Central Bank. Through statements of leaders, annual meetings, or Forward Guidance.
An illustrative example of “Central Banks’ views on Dovish and Hawkish monetary policy for you to better understand what is hawkish
Based on the image above, we can see what happens when we execute what is hawkish. We can expect that the Central Bank will increase interest rates. That country’s currency will also increase in value. On the contrary, when the Forex Dovish pattern is implemented, the graph tilts towards the right. We can predict that interest rates will decrease, causing that country’s currency to also decrease in value. Learn more about the definition of what is stochastic to be able to give signals about price fluctuations right before they happen.
See more: Discover Exness – The world’s leading Broker
How to effectively use Dovish and what hawkish policies
For a clear and understandable illustration, consider an example of two coins. Each currency applies a different monetary policy. For example, in the illustrated trading chart, the Fed is implementing the Forex Hawkish model. Meanwhile, BOJ is implementing the Dovish policy.
So what does this mean? It signifies that the US Dollar will appreciate against the Japanese Yen. That means the exchange rate of the USD/JPY foreign exchange pair may be on the rise. And it will probably continue to rise for a while. Of course, before the FED and BOJ make major decisions regarding their monetary policy.
By analyzing such basics, traders can predict price trends. That helps them form a basis for their decisions. However, to achieve successful investment results, traders need to combine deep technical analysis skills to identify effective entry points.
To manage the trade effectively, traders can use the previous support level (which turns into a new resistance level). Or use the moving average MA to set the appropriate stop loss level. Furthermore, traders can also use the trailing stop strategy. To make the most of available interest rate fluctuation trends forecasts.
Conclude
We hope that through sharing and analysis in the Forex Trading field, traders have been able to better understand the meaning of the Forex Dovish and what is hawkish model concepts, as well as how to use the two. this policy effectively. As participants in the foreign exchange market, we need to pay special attention to information related to the monetary policies of Central Banks.
In addition, it is also necessary to clearly understand the meaning of those news and announcements. Just like how Central Banks carry out their monetary policies. This helps us make more accurate predictions about currency trends. Hope you grasp important information and make the right decisions!
Frequently asked questions about what is hawkish
The difference between the two policies is Dovish and what is hawkish?
what is hawkish? That is when a Central Bank applies a tighter monetary policy. Usually includes raising interest rates to control inflation. Meanwhile, Dovish is when a Central Bank adopts a more flexible monetary policy. Usually involves reducing interest rates to stimulate economic growth.
What is Forward Guidance and its role in investment decisions?
Forward Guidance is a tool that Central Banks use. To provide forecasts of future monetary policy and economic conditions. It helps investors shape trends. They can make decisions based on these forecasts.
What strategy should be applied when responding to Forward Guidance by Central Banks?
Investors often use Forward Guidance to predict market trends. It helps them adjust their strategy. They can buy or sell depending on monetary policy forecasts and economic outlook.
