#18: What is the meaning of Dovish
What is the Meaning of Dovish
When you hear the word Dovish, it means the central bank has loosened monetary policy by lowering interest rates.
This subsequently lowers the inter-bank borrowing rate, mortgage rate and fixed deposit rate.
A Dovish monetary policy will encourage:
- Consumers like us to spending money on goods and services
- Companies to borrow money from the banks for expansion
The reason? To stimulate the economy back to health.
(Note: The opposite of Dovish is Hawkish)
How does a Dovish policy impact your trading?
A Dovish monetary policy means interest rates will be lower.
So, investors will move their funds to other countries to earn higher interest rates.
So when a country adopts a Dovish stance, demand for its currency will fall and depreciate.
Also, a Dovish monetary policy can be further classified into:
- Expected Dovish policy
- Unexpected Dovish policy
Let me explain…
1. Expected Dovish policy
If a Dovish policy is expected, then the news is priced in and you’ll unlikely see sudden spikes on the chart.
2. Unexpected Dovish policy
If a Dovish policy is unexpected, then you’ll likely see sudden spikes on your chart to take into account the unexpected Dovish news release.
How to take advantage of a Dovish central bank in Forex trading
A central bank’s monetary policy on interest rates is a key driver of the Forex market.
Here’s what you’ll do:
You’ll find another currency that belongs to a country with a Hawkish monetary policy.
Let’s say China’s central bank is Dovish.
The currency, Chinese Yuan (CNH) will be weak.
If the US’s Federal Reserve is Hawkish, the US Dollar (USD) will be relatively stronger than CNH.
So what does this mean?
USD/CNH is likely to be bullish – as you need more CNH to exchange for 1 unit of USD.
This trend will likely to continue for a good number of months before the central banks announce their next major policy decision.
Thus you’ll want to look for bullish setups to go long.
Here are some ways to trade this:
- Trade the breakout – go long when the price breaks above the previous swing high
- Trade the pullback – go long when the price bounces off the 50 MA
For trade management, trail your stop loss with either:
- Moving average
- Previous resistance turned support
This way, you’ll be able to ride the trend for all that it’s worth.
Avoid getting caught with your pants down – use Forex Factory to see upcoming major economic news.
That way, you’ll know when each central bank will announce their next major policy decisions.