At the end of last year, the thinking was that 2023 would be the year of central bank pivots and more importantly the time when the Fed would stop rate hikes. And with a shallow recession predicted, it should've been a time for risk assets to rejoice and the dollar to turn tail and run.
Then came the story of stubbornly high inflation and the "6% trade" in January and February. That pushed the timeline back and the dollar was stronger as a result. But then came the unexpected twist and a major shift to the market and rates outlook.
The regional banking crisis struck in March through to April and that saw a complete revamp in terms of what markets were expecting.
From thinking that the Fed might need to go to 6% or at least hold rates higher for longer, we suddenly see traders price in rate cuts instead. The thought here is that the tightening cycle has finally broken something, which is a typical saying and sign that this is where things stop.
Yet, the Fed was still confident enough to deliver one more 25 bps rate hike earlier this month and even against the backdrop of three rate cuts priced in by year-end, the dollar hasn't exactly crumbled - at least not in a major, major way.
We have seen the likes of EUR/USD move up from 1.0600 in March to the highs of 1.1000 recently but the triple top pattern there may be suggestive of a stronger pullback. In fact, we are now nudging close to a test of the 100-day moving average again with the level seen at 1.0806 at the moment.
USD/JPY, while largely more impacted by the bond market, is trading back above its 200-day moving average of 137.07 and running up against a test of the key resistance region at 137.77-91 currently.
And when you look over to the antipodeans, AUD/USD has been trending more sideways since March around 0.6600 to 0.6800. The 100-day moving average - now at 0.6785 - has been a key line in the sand for buyers during this period.
All of this comes despite the more resounding rebound in equities, with tech stocks looking to break out further now.
As things stand, the view in markets that the Fed pivot is coming hinges a lot on economic data. We won't be seeing Powell come out to explicitly call that. So, until there is a meaningful turn in inflation or something else breaks in the economy, it isn't clear whether or not we are really getting to that point yet.
And somehow, traders are convinced enough to price in three rate cuts. And that could very well backfire and turn into a tailwind for the dollar down the road. That is something I talked about previously as well here.