Hawkish vs Dovish: Differences Between Monetary Policies.

We just learned that currency prices are affected a great deal by changes in a country’s interest rates.

We now know that interest rates are ultimately affected by a central bank’s view on the economy and price stability, which influence monetary policy.

Central banks operate like most other businesses in that they have a leader, a president, or a chairman.

It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens.

So by using the Pythagorean Theorem (where a² + b² = c²), wouldn’t it make sense to keep an eye on what those guys at the central banks are saying?

Using the complex conjugate root theorem, the answer is yes!

Yes, it’s important to know what’s coming down the road regarding potential monetary policy changes. Lucky for you, central banks are getting better at communicating with the market.

Whether you understand what they’re saying, well that’s a different story.

So, the next time Jerome Powell or Christine Lagarde are giving speeches, keep your ears open. Better yet, use the Forex Factory Calendar (www.ForexFactory.com) to prepare yourself before the actual speech.

The Gospel

While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say is only not ignored, but revered like the gospel.

Okay, maybe that was a bit dramatic, but you get the point.

Not all central bank officials carry the same weight.

Central bank speeches have a way of inciting a market response, so watch for quick movement following an announcement.

Speeches can include anything from changes (increases, decreases, or holds) to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes.

But don’t despair if you can’t tune into the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public.

Dissecting the News

Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information is involved.

Much like how the market reacts to the release of other economic reports or indicators, forex traders react more to central bank activity, and interest rate changes when they don’t fall in line with current market expectations.

It’s getting easier to foresee how a monetary policy will develop over time, due to increasing transparency by central banks.

Yet there’s always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected.

It’s during these times that market VOLATILITY is high and care should be taken with existing and new trade positions!

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