EU versus US Yield Spread: It seems to matter for the currency

If you can forecast interest rates, you should just trade bond futures and make a fortune and forget about currencies, to paraphrase John Percival of Currency Bulletin.   John’s point was simple and it was two-fold: 1) You shouldn’t base your currency forecast on your interest rate forecast; 2) Because no one can consistently forecast interest rates and even if you could it doesn’t mean it will help you with your currency forecast.  But most currency traders do watch interest rates.  That is because over time there does seem to be a correlation between rising a country’s rising yield differential (if for the right reason and usually driven by internal factors) and that country’s relative currency value. 

Interest rates are the real fundamental factor operating continuously in the background of the currency markets…