Breaking down currency jargon

If you’re not sure what the difference is between dovish and hawkish, a fixed exchange rate or a floating exchange rate, our latest blog might help you break down the foreign exchange jargon.

Forex or FX – a shorter way of saying foreign exchange.

Central bank – a financial institution providing services for the nation’s government and commercial banking system. The central bank has policymakers which decide a country’s monetary policy.

Monetary policy – decided by a nation’s central bank, monetary policy is the central bank’s actions determining the rate of money supply growth, interest rates, quantitative easing, etc.

Monetary stimulus – a way of increasing money or credit in the economy by lowering interest rates or using quantitative easing (QE).

Quantitative easing or QE – this type of monetary policy is used by a nation’s central bank where they create new money to buy financial assets, such as government bonds. QE is designed to help inflation levels reach the desired target by boosting private sector spending.

Interbank rate – this is the rate at which banks and other financial institutions buy and sell currency for with one another.

Fixed exchange rate – a currency value that’s confined to a limited range by monetary authorities, such as a central bank, to make currency movements less dramatic.

Floating exchange rate – a currency value that’s determined by supply and demand.

Safe-haven – A currency or asset investors turn to during market turbulence (like the Global Financial Crisis of 2008). Examples of safe-haven assets are the Swiss Franc or Japanese Yen.

Dovish – if a policymaker is described as being dovish, it means they’re more hesitant in their outlook on a particular topic. Dovish policymakers are unlikely to back any aggressive actions on monetary policy.

Hawkish – if a policymaker is hawkish they’re more likely to back changes to monetary policy or expect good levels of growth in the economy. Currencies can rise or fall significantly depending on how central bankers discuss different topics, specifically those regarding monetary policy and interest rates.

Bull (to be bullish) – someone who’s optimistic that values of a currency will rise.

Bear (to be bearish) – someone who believes a currency will fall.

Cable – the name given to the Pound to US Dollar (GBP/USD) exchange rate.

Spread – the difference between the interbank rate and the cost you pay for the currency; how banks and other financial institutions make their money. The spread will vary between different currency providers.

Gross Domestic Product or GDP – used to measure the rate of growth in a country by the number of goods and services it provides.

Consumer Price Index or CPI – a way of measuring inflation. Inflation is used to gauge the prices of goods and services and monitor how fast they’re rising or falling. Central banks will intervene to avoid deflation, which is when inflation sinks below 0.0%.

If you’d like to discuss your foreign exchange requirements without the jargon, call us on +44 (0)20 7989 0000.