After the inflation shock of 2022 and 2023, price pressures have finally started to cool. Inflation has not disappeared, but it has slowed, and that phase is known as disinflation. Prices are still rising, just not at the pace that unsettled households, policymakers, and markets a couple of years ago.
Picture this scenario: a central bank raises interest rates, yet the currency weakens instead of strengthening. It sounds counterintuitive, but seasoned traders know it’s not the rate hike itself that matters – it’s what the market expected to happen next. FX markets are forward-looking by nature, meaning they focus on where rates are headed rather than where they stand today.
Investors have spent the past two years in a will-it-or-won’t-it debate, wondering if economic growth could really hold up while inflation cooled off. Central banks have been trying to control inflation without triggering a recession, and as price pressures ease, markets keep asking: is this time different?
The US dollar has been the dominant force in global markets for the better part of the last few years. Back in 2022-23, the Fed’s aggressive rate hikes and waves of global risk-off sentiment pushed the dollar higher and higher. The DXY hovered in the low 100s, with every Fed speech and CPI print moving the needle. It was the trade that just kept working.
