If you are trading on the forex market, you have probably already met the terms dovish and hawkish. They are used to describe the orientation of the monetary policy of a central bank. Let us look at this in more detail.
Monetary policy hawkish
Generally, central banks have resorted to policies hawkish when they deem it necessary to fight against inflation. In such circumstances they are to use all possible means to combat it, including the interest rate increases.
The central banks use as the monetary policy hawkish during the period of economic growth or recovery.
On the forex, this type of policy leads generally to an appreciation of the currency of the country concerned.
Monetary policy Dovish
The monetary policy dovish is the objective of economic growth. The central banks then use all the means at their disposal to promote the growth of their country. Inflation is no longer a matter of concern. A policy dovish usually involves a lower interest rates as well as other measures that are less conventional image of the Quantitative Easing programme. The goal here is to boost the economy.
In a period of recession, the central banks also tend to put in place a policy dovish in order to avoid the risk of overheating of the economy.
The policies dovish lead generally to a depreciation of the currency in question on the foreign exchange market.
Finally note, that in recent years, major central banks like the fed or the ECB have used monetary policy dovish.