Since the start of the Iran war, investors have shifted from thinking the Federal Reserve might cut interest rates over the next year to bracing for a possible hike as rising oil prices triggered inflation fears. Now, derivatives contracts tracking expectations for Fed policy indicate that market participants may soon begin to factor in even more rate increases.
SOFR futures are derivatives contracts used to bet on the direction of interest rates. Their price, which is expressed in an index format, moves in the opposite direction of rates.
Trading at around 96.035, the SOFR contract expiring in March 2027 currently reflects expectations that the Fed will deliver one interest rate increase of 0.25% by that time.
The price of the March SOFR contract recently fell below a level that technical analysts call a "bear flag formation" and see as a harbinger of further losses.
A technical analysis tool called a Fibonacci projection indicates that the price could fall to 95.75. At that level, it would reflect expectations of two interest rate increases from current levels. After that, the next potential target for losses would be 95.51. That price would add one more rate hike to market expectations, for a total of three.
However, the market situation is fluid with investors hopeful of a deal to end the Iran conflict. Any change in market sentiment that fuels a rise in the March SOFR contract above the 96.30/35 level would diminish expectations of further falls.
What the chart shows:
(Daily markets commentary from Reuters analysts on the signals financial charts are sending - and what they might mean.)
