Major central banks have not changed their expectations for interest rates as they await new economic data. The US Federal Reserve plans a total cut of 53 basis points by the end of the year, with a 95% chance of keeping rates steady at its next meeting. The European Central Bank expects a 26 basis points cut, with an 89% probability of maintaining current rates. The Bank of England is projected to lower its rates by 55 basis points, with an 85% chance of a rate cut at its next meeting. The Bank of Canada may cut by 30 basis points but has a 72% likelihood of no immediate changes. The Reserve Bank of Australia is expected to reduce rates by 77 basis points, with a 94% chance of a cut soon.

Central Bank Expectations

The Reserve Bank of New Zealand predicts a cut of 31 basis points, with an 81% chance of holding rates steady for now. The Swiss National Bank anticipates a 9 basis points cut, with an 88% probability of no changes. Meanwhile, the Bank of Japan aims for an 11 basis points increase, with a 99% chance of keeping rates stable at the upcoming meeting. This section summarizes where major central banks stand on borrowing costs. Most are expected to cut rates by the end of the year but have no immediate plans to do so. Instead of a sudden shift, there’s a gradual movement toward easing. Central banks are likely waiting for economic data before making concrete changes. Although cuts are on the horizon, many are leaning toward keeping things steady for the moment. Japan is a clear exception, following its own course. It plans slight rate increases and shows almost total certainty of stability at its next meeting, taking a careful approach to normalizing its policy. Looking ahead, a few trends are emerging. While projections for terminal rates vary across regions, they all seem to follow a gentle trajectory without sharp changes. Short-term yields for major sovereigns are still heavily influenced by rates expectations. As long as central banks remain patient, we can expect minor flattening of implied rates. This won’t be a steep drop—just a slow easing of last year’s pricing pressures.

Market Trends and Strategies

Volatility may quiet down unless an unexpected event occurs. With major meetings completed and most central banks signaling a wait-and-see approach, the immediate market drivers will likely come from inflation reports, labor market statistics, and growth indications. This means investors will focus more on how the actual data deviates from forecasts rather than the data itself. A surprising rise in inflation, for instance, could temporarily pause easing momentum, with the importance lying in the degree and persistence of that surprise rather than just one report. We’ve already factored in rate cuts to different extents, so any potential turbulence will likely stem from adjustments rather than new direction. If inflation doesn’t decline as expected, markets will need to prepare for a slower easing pace than what’s currently implied. On the flip side, weaker-than-expected activity could speed up rate cut expectations, especially affecting commodity-linked currencies and their associated yields. For our strategy, it’s crucial to maintain short-term hedges and avoid being overly confident in a single direction. Given that there’s a high likelihood of no changes in the next meetings, carry positions could yield modest returns in select currencies while being hedged against downturns. Skew should remain low, which supports neutral volatility positioning in the short term, unless data triggers a repricing. We don’t expect sudden disruptions but will monitor areas where rate cuts are heavily anticipated without supporting data. In those scenarios, any repricing could be sharp and one-sided, particularly beyond a three-month timeframe. In this market, discipline is critical in timing reactions. Allow the data to guide decisions. Ensure gamma is controlled, especially before major releases, and keep an eye on cross-market correlations, which may become more significant if rate paths diverge. Create your live VT Markets account and start trading now.

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