Real Interest Rate Differential - Correcting for inflation? 2, 5 or 10 year?

I’ve gotten my head around interest rate differential as a means to better understand long-term moves in the forex market. However, it is a bit cloudy.

Which interest rate differential should I be looking at? The Great School of Pipsology doesn’t mention if it is 2 year, 5 year or 10 year?

Should I be looking at Interest Rate Differential (IRD base - IRD quote), or should I look at Real Interest Rate Differential which considers inflation as well? (IRD base - CPI base - IRD quote - CPI quote).

Lastly, if I look at the EURUSD - it seems that the Euro is missing from my platform and referred to as DE (for Deutche Bundesbank) which is Germany obviously. Is that correct? Germany may be the major driving force of the Euro, but wouldn’t it be better to use the ECB data?

The numbers can be ready available on my platform, so I’m curious if someone could spread some light on this.
Thanks.

@BobDabolin

I would imagine it was the real interest rate differential.

If it wasn’t the Turkish Lira and Venezuelan Bolivar would be the strongest currencies in the world!!

@Johnscott31

Exactly! So I am a bit surprised when I read about Interest Rate Differential everywhere (not only here on BabyPips) as not accounting for Inflation. There is no point in buying a currency with high interest rate and an even higher inflation.

How about which yield to look at? 2, 3, 5, 7, 10 years? They do follow each other but not consistently.

And what about the EURO zone. I see many sites directing the interest to German Bundesbank Bond and not the ECB Euro Bond.

Any takers?

@BobDabolina

Well I think the Euro is really just the old German currency repackaged.

Its really all about Germany.

The euro was really only set up to weaken the old German Mark so they could flog things on the cheap - IMO.

As for the yield duration I would say 10 yr is most important. That’s what bond traders follow most in US treasuries - can’t see it being any different in Europe.

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@Johnscott31

Many thanks for your input. Back to coding the results into a nifty indicator :slight_smile: