Rate Dispersion

Overnight rates drive much of the action in currency markets. It is not the actual rates but what the expectation of those actual rates will be in the future. So if the Fed is expected to hike rates sooner than later and the ECB is expected to be on hold with a bias to cut sometime in the future, then there will be an pressure on the Euro to weaken vs the greenback. Of course there are other variables which I attempted to capture in this measure you see on the chart. The current levels represent where I believe overnight rates should be NOW for a given economy.

For example, I believe the Fed is too easy but it appears that the fair value is now making a more convincing move lower. Current policy in the UK is too tight by over 125bps. In the EU, their policy is too easy by 50bps. Bottom line, unless something dramatic happens here in the US on the economic front along with Fed tightening, the dollar will not be getting any support on this end...yet.