Here’s the thing: markets don’t just care about what one central bank does.
The real money moves happen when central banks take opposite paths.
1. What Policy Divergence Means
• Fed hikes, ECB stays cautious → EUR/USD drops.
• BOE tightens, RBA eases → GBP/AUD rallies.
• Fed aggressive, BOJ dovish → USD/JPY rockets.
👉 Traders call this divergence, and it’s the engine behind multi-month FX trends.
2. Why Divergence Creates Trends
• Currencies are relative assets.
• If every bank tightened together, FX would be flat.
• Divergence = widening interest rate differentials = capital shifting massively from one currency to another.
3. Case Study: Fed vs BOJ (2022–2023)
• Fed: Hiked aggressively (rates from near 0% → 5.25%).
• BOJ: Stuck with ultra-loose policy, capping 10Y yields at ~0.25%.
• Result: USD/JPY surged from ~115 to above 150 — one of the cleanest divergence trades in recent memory.
4. How Traders Spot Divergence Early
• Yield Curve Gaps: Watch spreads between 2Y or 10Y bonds across countries.
• Forward Guidance Language: Is one bank talking hikes while another stays dovish?
• Market Pricing: Futures curves (Fed Funds, OIS) reveal how much divergence is priced in.
5. The Trading Edge
Experienced traders know:
• Divergence trends last months or even years.
• Pullbacks are entry points, not reversals (until policies converge again).
• Pair selection matters: don’t just buy USD — buy it against the weakest CB currency.
Where we’re heading next: Tomorrow we’ll wrap up this mini-series by pulling everything together into a weekly synthesis with trade setups — showing you how to move from theory → positioning.
