FX Required Information - Foreign Exchange Market and Interest Rate Differential 2022/06/17

Essential basic information for those watching the exchange rates.

The market is determined by supply and demand, but the major factor moving supply and demand is the interest rate differential.

The relationship between the exchange rate and the interest rate differential isFXthe most important and fundamental.

You always need to keep track of that situation.

That relationship is not permanent. It often changes shape.

Regularly, we follow information about that relationship.

By the 6month mark, it has moved rapidly into a dollar rally.

The backdrop is that the current primary objective of the US monetary policy is to curb inflation, but (as seen in CPI) the prospect of inflation cooling in the US is becoming uncertain, and expectations have grown that the magnitude and pace of rate hikes will be higher.
However, on the other hand, signs of slowing US economy (as seen in retail sales) have emerged, and there are expectations that inflation will ease sooner or later.

Additionally, interest rate hikes by counterparties’ currencies have become prominent.Unexpected Swiss franc rate hikes have also occurred, making the future of the currency market even more unpredictable.

Below is the regular graph (dollar/yen, euro/dollar, pound/dollar, AUD/dollar and the correlations with their respective interest rate differentials).