The interest rate differential is the difference of the interest rates between two currencies in a pair.
For example GBP/USD
If the GBP has an interest rate of 4% and USD has an interest rate of 1.5%, the differential is +2.5%. This generally suggests hot money will flow towards the GBP as this currency pays the most interest while holding this currency. This would be bullish for the GBPUSD, based on the interest rates only.
If the GBP had an interest rate of 1% and the USD an interest rate of 4%, this would mean the differential would be -3%. Hot money will flow towards the USD. This would be bearish on the GBPUSD, again based on the interest rates only.
This is only a quick explanation how the Interest Rate Differential is calculated and how people can use it, but I suggest checking out some blog posts and YouTube videos by LogikFX which cover the IR differential for a better understanding!
There are also plenty of resources online which cover this topic, just google the term Interest Rate Differential!
Hi Umer,
The interest rate differential is the difference of the interest rates between two currencies in a pair.
For example GBP/USD
If the GBP has an interest rate of 4% and USD has an interest rate of 1.5%, the differential is +2.5%. This generally suggests hot money will flow towards the GBP as this currency pays the most interest while holding this currency. This would be bullish for the GBPUSD, based on the interest rates only.
Base Currency Interest Rate % - Quote Currency Interest Rate % = IR Differential %
Positive Differential = Bullish on the Pair
Negative Differential = Bearish on the Pair
If the GBP had an interest rate of 1% and the USD an interest rate of 4%, this would mean the differential would be -3%. Hot money will flow towards the USD. This would be bearish on the GBPUSD, again based on the interest rates only.
This is only a quick explanation how the Interest Rate Differential is calculated and how people can use it, but I suggest checking out some blog posts and YouTube videos by LogikFX which cover the IR differential for a better understanding!
There are also plenty of resources online which cover this topic, just google the term Interest Rate Differential!
Hope this helps!