#17: What is the meaning of Hawkish
What is the Meaning of Hawkish
When you hear the word Hawkish, it means the central bank has tightened monetary policy by increasing interest rates.
This subsequently increases the inter-bank borrowing rate, mortgage rate and fixed deposit rate.
A Hawkish monetary policy will discourage:
- Consumers like us from spending money on goods and services
- Companies from borrowing money from the banks for expansion
The reason? To slow down the “heated” economy.
(Note: The opposite of Hawkish is Dovish)
How does a Hawkish policy impact your trading
A Hawkish monetary policy means the interest rates will be higher.
So, investors will move their funds from other countries to earn higher interest rates here.
So when a country adopts a Hawkish stance, demand for its currency will rise and appreciate.
Also, a Hawkish monetary policy can be further classified into:
- Expected Hawkish policy
- Unexpected Hawkish policy
Let me explain…
1. Expected Hawkish policy
If a Hawkish policy is expected, then the news is priced in and you’ll unlikely see sudden spikes on the chart.
2. Unexpected Hawkish policy
If a Hawkish policy is unexpected, then you’ll likely see sudden spikes on your chart to take into account the unexpected Hawkish news release.
How to take advantage of a Hawkish 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 Dovish monetary policy.
Let’s say US’s Federal Reserve is Hawkish.
The US Dollar (USD) will also be pretty strong.
If Turkey’s central bank is Dovish, then Turkish Lira (TRY) will be relatively weaker than USD.
So what does this mean?
USD/TRY will likely be bullish – as you need more TRY 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.
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.