Interest rate expectations for major central banks have changed little, despite many new data reports. Year-end forecasts suggest the Fed may cut rates by 47 basis points, with a 95% chance of keeping them steady at the next meeting. The ECB is expected to lower rates by 25 basis points, with a 92% likelihood of no change in the upcoming meeting. The BoE anticipates a 50 basis point cut, with an 83% chance of a reduction soon.

Other Central Banks’ Rate Expectations

Other central banks, like the BoC, expect a 17 basis point cut but have an 89% chance of keeping rates unchanged. The RBA predicts a 65 basis point reduction, with a 92% probability of a cut at the next meeting. The RBNZ is projected to lower rates by 37 basis points, with a 75% chance of taking action soon, while the SNB expects an 8 basis point cut, with an 85% likelihood of no change. For rate hikes, the BoJ plans a 15 basis point increase, but there is a 99% chance they will maintain current rates at the next meeting. The RBNZ’s recent shift towards a dovish stance follows lower-than-expected inflation data from New Zealand, although overall expectations remain stable. Since rate expectations are firmly established, we can expect lower volatility in interest rate markets. This situation suggests that strategies profiting from time decay, like selling options, could be beneficial. However, we should stay alert for any data that might provide a strong enough reason to change current market pricing. For the Federal Reserve, the 47 basis points of anticipated cuts by year-end seem ambitious given recent data. With US inflation remaining high at 3.1% annually and Chairman Powell advising patience, there’s an opportunity to position for fewer cuts than expected. A strong jobs or inflation report could quickly change these dovish views.

Outlook for Major Economies

The European Central Bank faces a similar scenario, where President Lagarde is countering speculation about rate cuts, even as headline inflation drops to 2.8%. Her emphasis on ongoing wage growth suggests that the 25 basis points of expected cuts may be premature. We see potential in trades betting on the bank keeping rates steady longer than expected. The Bank of England and the Reserve Bank of Australia have the most aggressive easing priced in, making them likely candidates for directional trades. In Australia, inflation unexpectedly decreased to 4.1% in the last quarter, giving Governor Bullock flexibility. We believe the RBA is better positioned to make the first rate cut, making long positions in Australian government bond futures appealing. The Bank of Japan is the clear outlier, as the market anticipates a 15 basis point hike. Attention will focus on the upcoming “shunto” spring wage negotiations, which Governor Ueda sees as essential for ending negative interest rates. We should seek opportunities to position for a stronger yen or higher Japanese yields as this policy change approaches. The reassessment for the Reserve Bank of New Zealand after the weak CPI was minimal overall. Both the RBNZ and the Bank of Canada have little movement priced in, indicating that trader resources might be better allocated in markets with clearer triggers. These currencies are likely to be influenced by larger counterparts for the time being. Historically, markets tend to anticipate central bank shifts, as seen in late 2018 when traders expected Fed cuts that took longer to materialize. This history reinforces our view that current pricing for the Fed and ECB is overly optimistic. We should prepare for a situation where these central banks may disappoint market expectations soon. Create your live VT Markets account and start trading now.

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