Monetary Policy and therefore interest rates are the most likely mover of the currency markets. This in turn sent interest rates like the year treasury lower as well which can be a proxy for currency strength and the currencies respective borrowing rates. A dovish central bank, which gets its namesake from a safe and docile bird, has a few main goals that you should always keep in mind that is to revive or jumpstart the economy after a slump.
First, by keeping interest rates low they allow money to move freely within the economy, which allows the economy to hopefully pick itself up by its bootstraps. Secondly, a dovish central bank like the US Federal Reserve currently is labeled as takes on different means of stimulating the economy like buying up underwater or underperforming assets on a banks balance sheet that in turn hold the banks back from operating at full speed.
This second type of stimulus is known as Quantitative Easing or QE. Today, the Fed said it needs more economic evidence before adjusting the bond buying program or QE.
The current dovish Fed also said that until the data shows a marked improvement that a reduction in their dovish stance will not falter. This data dependent view further shows that the Fed is looking to a rebound in the job market and consumer sentiment before considering a move to a hawkish standpoint.
A hawkish central bank, which gets its namesake from the predatory and unsympathetic nature of the hawk bird, has a few main goals that strive to prevent an economy from overheating likely due to their prior dovish stance. A hawkish central bank is likely less concerned with economic growth than with pressure brought about by the high inflation rate that can spin an economy out of control.
Last week, the Reserve Bank of New Zealand or RBNZ took the most hawkish stance among the developed economies as they provided a timeline for raising the central bank rate to prevent inflation from getting out of hand in their improving economy.
Other Central Banks that are on the verge of showing a hawkish bias after improved economic data is the Bank of England, which naturally has brought the GBP near the top perform major currencies along with the New Zealand Dollar. Naturally, the hawkish currency will generally appreciate on the FX market compared to other dovish currencies that are diluted via inflation. Therefore, a newly hawkish currency with rising interest rates should be sought to buy that currency basket and a dovish currency with low interest rates should be sought out to sell that currency against others, as it is likely to fall like the US Dollar did today.
To contact Tyler, email tyell dailyfx. New to the FX market? In the course, you will learn about the basics of a FOREX transaction, what leverage is, and how to determine an appropriate amount of leverage for your trading. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event. Forex Economic Calendar A:More...