What is an interest rate differential in forex?

It is the difference between the interest rates of the two currencies in a pair. It determines the swap you pay or earn to hold a position overnight and is one of the strongest medium-term drivers of exchange rates.

What is the FedWatch tool?

It expresses the market's implied probability of each possible Federal Reserve rate outcome at upcoming FOMC meetings, derived from fed funds futures pricing rather than from forecasts or opinion.

How does the interest rate differential affect a currency pair?

Capital tends to flow towards higher real yields. A widening differential in a currency's favour attracts that flow and supports the exchange rate; a narrowing one removes the support.

Which pair has the biggest carry?

It changes with the policy cycle. Historically the yen and franc have been the funding currencies, with higher-yielding dollar, Australian dollar, New Zealand dollar and emerging-market currencies on the other side.

FX TERMINAL

Rate Differentials

Rate differentials are the engine of FX trends. Compare policy and market rates across the major currencies to see the carry each pair offers and how that gap is shifting, then switch to the FedWatch view for market-implied probabilities of the next Federal Reserve decision derived from fed funds futures.

The rate gap behind every currency pair

A currency pair is a trade in two interest rates. This screen compares policy and market rates across the majors so you can see the carry each pair offers, how wide the gap is versus history, and — more importantly — which direction it is moving. Currencies trend when the differential is widening, not merely when it is wide.

The FedWatch view converts fed funds futures into market-implied probabilities for upcoming FOMC meetings, giving you the market's own odds on a cut, a hold or a hike. When those odds shift, the dollar reprices before the Fed ever meets.

Carry trades and their risk

Borrowing a low-yielding currency to hold a high-yielding one earns the differential daily through swap. The catch is that carry trades pay slowly and lose quickly: when volatility spikes, the unwind is violent and the exchange rate move can erase months of accrued interest in days.

Check positioning in COT analysis and retail sentiment before joining a crowded carry, and watch bond yields for the earliest sign that the differential is turning.

Frequently asked questions

What is an interest rate differential in forex?: It is the difference between the interest rates of the two currencies in a pair. It determines the swap you pay or earn to hold a position overnight and is one of the strongest medium-term drivers of exchange rates.
What is the FedWatch tool?: It expresses the market's implied probability of each possible Federal Reserve rate outcome at upcoming FOMC meetings, derived from fed funds futures pricing rather than from forecasts or opinion.
How does the interest rate differential affect a currency pair?: Capital tends to flow towards higher real yields. A widening differential in a currency's favour attracts that flow and supports the exchange rate; a narrowing one removes the support.
Which pair has the biggest carry?: It changes with the policy cycle. Historically the yen and franc have been the funding currencies, with higher-yielding dollar, Australian dollar, New Zealand dollar and emerging-market currencies on the other side.

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Data sources

All data, readings, analysis and numbers on FX Terminal are for informational purposes only and do not constitute financial advice. FX Terminal is not responsible for any investment decisions or outcomes. Please read the full disclaimer at fxterminal.app/disclaimer.