How to Trade Central Bank Speakers
This post is for those just starting out and getting their heads around central bank speakers.
Recently, the USD has been particularly sensitive to changing views by board members; so trading, especially intraday trading, has many different skill sets required to learn. One of those skills is the skill of trading central bank speakers. That being the case, this article will give you a brief outline of how to trade central back speakers.
Central banks are in charge of the monetary policy for their country. As such, the Federal Reserve is the central bank for the United States. Now a number of people are responsible for ultimately making the decision about whether interest rates are going to rise, fall, or stay the same. Now leading up to central bank meetings it is widely known what each individual central speaker thinks regarding the coming monetary policy decision. For speed of analysis, the central bank speakers are given one of three labels. They are either hawkish (looking to hike rates), bearish (looking to cut rates), or neutral (looking to keep rates unchanged). It is the sum of all these individuals.
The trade is in the change
Now the market ‘prices in’ the views of the central bank speakers and price will move to reflect those central banker’s changing views. So, the opportunity comes from the shift in views. To help you understand this, think of this silly example. Imagine that your friend only drinks hot water. Every time you have a meal together, they order hot water. At your house, they have hot water. They always have hot water. Whenever they ask for it you are not surprised. Naturally, you ‘price in’ your friend having hot water. One time they come to your house and you have run out of milk, so you don’t worry because your friend always has hot water.
Imagine your surprise when your friend orders a coffee to drink. Now coffee is not an unusual drink. However, for your friend, it is very unusual. The shift in their outlook is significant to you and you would probably comment ‘I have never heard you order coffee before! What’s going on?’. It is exactly the same with central bank speakers. The trade is in recognising the change. When a hawk turns dovish, there is a price reaction and vice versa. This is what you want to look for.
Giles Coghlan
