Implied Forward Rates:the path the market expects.
Implied forward rates show where the market expects interest rates to be at future dates. Drawn as a line, that is the expected rate path.
When the path shifts, currencies move. Comparing today’s path with last month’s tells you how much the story changed.
What it shows
The implied rate for each future date, the path over the next months and how it compares with an earlier date.
How to read it
A path that moves lower means the market expects more or faster cuts. For the currency, that is usually negative. A path that moves higher is usually positive.
Use it in real trading
The tool informs the decision, it never makes it. Here is how it plays out on real trading days.
The US path moved down 20 basis points in a month. The dollar weakened with it. Your EURUSD long has the rate story behind it.
Both the US and euro paths move lower. The spread barely changed, so EURUSD has no rate reason to move.
Mistakes to avoid
- Looking at 1 country without the other.
- Confusing the policy rate with the expected path.
- Ignoring how far out the change happens.
What makes it different
The rate path sits next to Interest Rate Probability and the bias drivers, so you connect rates and currencies in 1 place.
Questions
What is a basis point?
0.01%. 25 basis points is a quarter point.
Why compare 2 dates?
Because the change moves markets, not the level.
Which currencies?
The majors.