What Is Hawkish and Dovish in Forex?

What is hawkish and dovish? Hawkish means a central bank leans toward higher interest rates to bring inflation down. Dovish means it leans toward lower rates to support growth and jobs. A hawk is a policymaker who worries most about inflation; a dove worries most about growth.

Statements, speeches and press conferences are read through this lens: did the bank sound more hawkish or more dovish than markets expected? Who decides at each bank is on The central banks.

Why tone moves currencies

A currency tends to follow the expected path of its interest rates. Hawkish messages push expected rates up, which draws capital in and supports the currency. Dovish messages do the opposite.

What counts is the gap between what policymakers say and what markets had already priced. A bank can cut rates and still see its currency rise, if the cut was fully priced and the message with it was less dovish than feared.

An example: markets have priced a cut at this meeting and two more later in the year. The bank delivers the cut, but says it wants more evidence that inflation is under control. Markets take one of the later cuts out of their pricing, and the currency can rise. The decision was dovish; the guidance was hawkish, and the guidance changed the expected path.

Where the clues are

• The statement’s wording: whether inflation is “persistent” or “easing”.
• The vote: a split vote says the committee is less settled than the decision.
• The press conference: how questions about the next move are answered.
• The projections, such as the Fed’s dot plot.

Individual policymakers get the labels too. A known hawk calling for hikes is expected. A known dove saying the same thing is news.

Common mistakes

• Reacting to the word instead of the surprise. “The ECB sounded dovish” means little unless it sounded more dovish than markets had priced.
• Weighing every speaker the same. Keep track of where each member usually sits, and ask what was priced before the headline.

The scheduled decisions are on Fed Interest Rate Decision (FOMC), ECB Interest Rate Decision and Bank of England Rate Decision.