Expectations for interest rate changes this week have remained stable without major shifts. By the end of the year, the anticipated rate cuts are projected as follows: – **Fed:** 71 basis points, with a 92% probability of a rate cut. – **ECB:** 4 basis points, with a 97% probability of maintaining current rates. – **BoE:** 9 basis points, with a 98% probability of no change. Other central banks are also adjusting their forecasts: – **BoC:** 43 basis points cut – **RBA:** 30 basis points cut – **RBNZ:** 38 basis points cut The **BoJ** and **SNB** are expected to keep their rates unchanged. By 2026, overall easing is anticipated, with the following cumulative reductions: – **Fed:** 145 basis points – **ECB:** 10 basis points – **BoE:** 42 basis points – **BoC:** 59 basis points – **RBA:** 48 basis points – **RBNZ:** 48 basis points – **SNB:** 6 basis points – **BoJ:** 50 basis points

Economic Indicators and Market Reactions

In the U.S., recent economic data has supported expectations for rate cuts, with a strong agreement for a total of 75 basis points of easing by year-end. The ECB appears more hawkish, as President Lagarde announced the end of the cutting cycle. Overall, the market remains cautious about significant changes due to potential effects on economic growth and inflation. With the Federal Reserve’s easing plans becoming clearer, we can expect lower interest rates in the U.S. August 2025 data showed the Consumer Price Index cooling to 2.8%, while initial jobless claims rose to 245,000, indicating a slowing economy. Traders might consider buying SOFR futures or call options on Treasury bonds to prepare for the 71 basis points of cuts expected by year-end. The market might be undervaluing the chances of a 50 basis point cut at the Fed’s meeting next week. The implied volatility for short-term interest rate options seems too low, suggesting an opportunity to buy inexpensive options that would benefit from a larger-than-expected rate cut as the Fed aims to address the economic downturn.

Central Bank Policy Divergence

The European Central Bank is signaling a different direction, with President Lagarde confirming the end of the cutting cycle. This hawkish stance aligns with persistent Eurozone inflation, which held steady at 2.9% in August 2025. This creates a clear divide in policy direction compared to the U.S., encouraging strategies focused on a stronger U.S. dollar against the euro, such as selling EUR/USD futures. Additionally, the Bank of Canada and the Reserve Bank of New Zealand are also expected to cut rates soon. This marks a significant shift from the first half of 2025 when many central banks held firm. We see this as a clear sign to short the Canadian and New Zealand dollars against the U.S. dollar. Create your live VT Markets account and start trading now.

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