If there is one thing that you should know, it is that the forward curve is almost always wrong. In other words, the market's thinking of how the Fed funds rate is going to pan out in the next 12 months is usually not the way the actual rate trajectory tends to manifest. It is a tale as old as time. This was the latest snapshot from last week, before the Fed's decision yesterday:
Let's zoom in to the current pricing to see what the curve is saying for the remainder of the year:
It is reflecting the narrative that we will see three rate cuts - very much firmly priced in - by year-end with the first rate cut to hit in September.
And so if the market is getting this wrong again, there is a chance that this kind of situation could turn into a dollar tailwind in the months ahead. If the Fed can hold steadfast to the idea of higher for longer rates, there will have to be a repricing in the curve and that is likely to be dollar supportive.
At this point, one can argue that the market is betting that the rate hikes by the Fed is going to break something else or worsen the banking turmoil so much so that policymakers will have no choice but to cut rates instead.
So, which one of those do you actually think is the bolder view at the moment?
