[12] To the extent that the current and expected future path of short-term interest rate differentials quantitatively dominates currency risk premia, it follows that the exchange rate may react more strongly to news about the path of the short-term policy rate than to news about asset purchases that operate through the compression of term premia.
In line with the predictions of uncovered interest rate parity, model-based analysis indeed confirms that the euro-US dollar exchange rate is much more reactive to “rate expectations” policy shocks such as rate cuts than to “term premia” policy shocks, such as those due to the APP.