The Great Divergence in Monetary Policy: What Happens When Central Banks Move in Different Directions
🌐 The "Great Divergence" Returns After 10 Years
Do you remember December 2015? There was a phrase trending in financial markets back then: "Great Divergence."
What happened? The United States raised interest rates for the first time in 7 years and 8 months since the financial crisis. Meanwhile, the European Central Bank? At the same time, not only did they cut rates—they started quantitative easing.
One side tightening, the other easing. That was the Great Divergence.
And now, 10 years later in 2026, the Great Divergence is back. 😮
🏦 Where Are Central Banks Around the World Heading?
Currently, central banks around the world can be divided into three groups:
📉 Group 1: Rate Cuts (United States)
The US Federal Reserve is still expected to continue cutting rates.
- Already cut 175bp
- Additional cuts possible
- But the pace may slow
⏸️ Group 2: Wait-and-See (Australia, Canada, Europe, Korea, Switzerland)
These countries have paused rate cuts.
Australia 🇦🇺
- Rate cuts on hold
- May even consider rate hikes from February
Canada 🇨🇦
- Rate cuts paused
Europe 🇪🇺
- Rate cuts on hold
- ECB Executive Board member Isabel Schnabel mentioned "we could consider hikes"
- Schnabel is a powerful figure, often mentioned as a future ECB President candidate
Korea 🇰🇷
- Rate cuts paused
- Monetary Policy Committee vote split 3-3 (cut vs. hold)
Switzerland 🇨🇭
- Rate cuts also paused
📈 Group 3: Rate Hikes (Japan)
Japan is the only country preparing to raise rates!
- Japan maintained negative rates for years
- Now preparing rate hikes as part of normalization
- Moving in the opposite direction from others
⚡ Why Is This a "Great Divergence"?
How did things work in the past?
When the US raised rates? → Other countries followed with rate hikes When the US cut rates? → Other countries followed with rate cuts
Moving in line with America was the norm.
But now?
| Country/Region | Direction |
|---|---|
| United States | Cutting |
| Australia, Canada, Europe, Korea, Switzerland | Wait-and-see (some considering hikes) |
| Japan | Hiking |
Countries are splitting into three paths, each moving in different directions. This is the Great Divergence in monetary policy.
💱 Impact on Currency Markets
When monetary policy diverges, currency analysis becomes complicated.
Traditional Approach
Traditionally, currency analysis focused heavily on interest rate differentials between countries.
- Country A's rate higher than Country B? → Country A's currency strengthens
- Simple, right?
Current Situation
But what happens when countries don't move together and move differently?
It creates many variables. In the words of currency experts, it feels like "solving a seventh-degree equation." 😅
Dollar Outlook
Theoretically, dollar weakness is expected.
- Since the US keeps cutting rates
But reality...
As we've seen, despite the Fed cutting 175bp:
- 2-year yields barely moved
- 10, 20, 30-year yields actually rose
Markets are not following theory.
📈 Currency Volatility Has Already Begun
Looking at the USD/KRW exchange rate this year:
| Period | Rate | Situation |
|---|---|---|
| Q1 | 1,480 won | "Going to 1,500" predictions |
| Mid-year | 1,347 won | "Going below 1,300 with Mar-a-Lago accord" predictions |
| Now | 1,470-80s | Back up again |
The currency drew a massive V-shape over the year.
Market experts once said "it's going to 1,500," then said "it's going below 1,300"... Both predictions were wrong.
Outlook for Next Year
Rather than predicting a specific direction, the more realistic forecast is that volatility will be quite high.
Due to the monetary policy divergence:
- Many unpredictable variables
- Difficult to commit to one direction
- Significant volatility expected
📝 Monetary Policy Divergence at a Glance
US 🇺🇸 ─────────────────────→ Rate Cuts
↑
[Great Divergence!]
↓
Australia/Canada/Europe/Korea/Switzerland ───→ Wait-and-See (some considering hikes)
↓
Japan 🇯🇵 ─────────────────────→ Rate Hikes
🚨 Implications for Investors
1. Don't Bet on One Direction
Dollar strength? Weakness? It's hard to be confident either way.
2. Prepare for Volatility
Focus on volatility itself rather than direction. Currencies are likely to move significantly.
3. Watch Each Central Bank Separately
Don't just watch America. Track the movements of central banks in Europe, Japan, Korea, and others individually.
4. Monitor Bond Markets
The disconnect between policy rates and market rates may continue. Be especially cautious with long-term bond investments.
💡 Final Thoughts
One of the key themes for 2026 is definitely the "Great Divergence in Monetary Policy."
Just as the US and Europe diverged in 2015, now even more countries are going their own ways. The US is cutting, Japan is hiking, and the rest are watching...
In this situation, currencies are hard to predict, and volatility will inevitably rise.
As an investor, the most important thing might be "not being too confident." When markets get this complex, it's wiser to prepare for multiple scenarios rather than going all-in on one direction.
2026—only prepared investors will survive! 💪