Expectations for interest rates from major central banks are steady. Markets are waiting for policy announcements and important economic reports like the US Non-Farm Payrolls (NFP) and Consumer Price Index (CPI). Here are the expected rate cuts by the end of the year: – The Fed is likely to cut by 44 basis points, with a 97% chance of no change at the next meeting. – The ECB may decrease rates by 14 basis points, with a 90% chance of keeping rates steady. – The Bank of England (BoE) could reduce rates by 46 basis points, with an 88% likelihood of a cut. – The Bank of Canada (BoC) anticipates a 14 basis point cut, holding a 92% probability of no rate change. – The Reserve Bank of Australia (RBA) might cut by 59 basis points, while the Reserve Bank of New Zealand (RBNZ) could lower rates by 35 basis points, with probabilities of 83% and 72% for cuts, respectively. – The Swiss National Bank (SNB) expects an 8 basis point cut, with an 86% chance of no change.

Focus Shifts To The Fed

The Bank of Japan (BoJ) is looking for a 19 basis point rate hike but has a 98% chance of making no changes. Starting in early April, tariffs influenced the economy, but now focus is shifting to the Fed. Economic data and the Fed’s guidance are expected to take center stage for the rest of the year. With major central banks holding their ground, the market is in a wait-and-see mode. Old news about tariffs and political bills has been fully absorbed, leading to a pause for the next market driver. We believe the rest of the year will center around economic data and the Fed’s insights. The Fed is now in the spotlight, especially as markets anticipate a 44 basis point cut by year-end. The most recent US Consumer Price Index report for June 2025 showed a slightly stubborn inflation rate of 3.4%. Meanwhile, the jobs report highlighted a solid but unremarkable increase of 195,000 jobs. This mixed information keeps traders uncertain, making upcoming Non-Farm Payroll and inflation figures in August especially important.

Preparing For Increased Volatility

Given the uncertainty surrounding the Fed’s next steps, traders should brace for increased volatility. Using options to buy straddles or strangles on major instruments like the SPX index or EUR/USD currency pair before key data releases may be a smart strategy. This approach allows traders to benefit from significant price movements in either direction. We are also keeping an eye on the strong possibility of rate cuts from the BoE, RBA, and RBNZ. Recent UK retail sales data for June showed an unexpected drop, while Australia’s latest quarterly inflation eased more than expected. This supports the case for easing monetary policy, making shorting these currencies against the US dollar an appealing strategy. To capitalize on this, we’re looking at derivatives that gain value from lower interest rates in these countries. Interest rate swaps could be utilized to prepare for declining policy rates from the BoE and RBA. We also expect continued weakness in currency pairs like GBP/USD and are using put options to express this view while managing risk. The Bank of Japan stands out with a market expectation of a 19 basis point rate hike by year-end. This view is backed by Japan’s core inflation remaining above the 2% target for 18 months—an unprecedented situation in decades. This divergence in policy compared to other G7 nations is a significant theme. This makes shorting the Japanese Yen an enticing opportunity for the latter half of the year. We are looking to position ourselves by considering long trades in pairs like USD/JPY and even AUD/JPY, where one central bank is cutting while the other is looking to raise rates. Using call options on these pairs can help manage the risk of any unexpected policy changes from the BoJ. Create your live VT Markets account and start trading now.

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