What's priced in versus what isn't?
The market's expectations are already in the price — the trade is always about the gap between expectations and reality. Reading what's priced in is the core macro skill.
How do you measure it?
- the sources you use for market pricing
- a current example of a gap you see
- how a gap becomes a trade for you
Background: bond yields and exchange rates explains the pricing mechanics.
Background: Bond yields and exchange rates: why currency traders watch the 2-year yield
Currencies often follow the gap between two countries' government bond yields. How yield differentials work, why 2-year yields track central bank expectations, and when the link breaks down.
Why do currency traders watch bond yields?
Because money tends to flow toward higher returns. The gap between two countries' bond yields, especially 2-year yields that track central bank expectations, often moves in line with their exchange rate.
What is a yield differential?
The difference between the yields on comparable government bonds in two countries, such as US and German 2-year bonds. A gap widening in one country's favour tends to support its currency.
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