How Markets Price Expected Interest Rate Gaps
Understand market-implied rate expectations, policy-rate futures, OIS markets and why forward divergence can change before central banks make decisions.
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Current policy is not the whole story
Today's official rate gap uses two already-announced central-bank benchmarks. The expected gap asks what those two benchmarks may be at a future horizon, based on appropriate market pricing rather than unsupported predictions.
The distinction matters because exchange rates often adjust to new information about future decisions long before any central bank changes its policy rate.
Where do market expectations come from?
Market participants trade instruments whose prices are linked to future short-term interest rates, including overnight-indexed swaps and certain short-term interest-rate futures. Those prices may be transformed into an implied forward rate path using instrument-specific conventions.
That is not identical to a published central-bank forecast. A market-implied path can also contain term premiums, liquidity effects, convexity and other technical factors.
Calculating a projected divergence
First estimate both central banks' comparable policy-rate levels for a shared horizon and observation time. Then calculate the signed base-minus-quote difference and compare it with the current signed policy-rate spread.
For example, a hypothetical +150 bp gap that moves to +100 bp is narrowing by 50 bp. If a gap crosses zero, the leadership of the higher-rate currency reverses. A projected widening or narrowing is not by itself a currency price forecast.
How to read Trade90's expected gaps
Trade90 will display the 3-, 6- and 12-month projected values only after a suitably licensed and validated market source is available for both currencies. Every forecast must carry a pricing timestamp, data source and methodology.
If the necessary data cannot be verified, the expected value stays unavailable rather than being filled in by a language model or an analyst's guess.
Apply this guide to EUR/USD fundamentals, GBP/USD fundamentals or AUD/USD fundamentals. Use the position size calculator to check your risk assumptions.