Recent events have changed how markets view interest rates across major central banks. The market expects significant rate cuts from the US Fed and the RBNZ. There’s a 92% chance the Fed will cut rates by 44 basis points in its next meeting, and a 78% chance that the RBNZ will lower rates by 58 basis points.

Central Bank Rate Expectations

The European Central Bank and the Swiss National Bank are likely to keep their rates the same, with probabilities of 99% and 95%, respectively. Meanwhile, the Bank of England and the Bank of Canada are also expected to hold rates steady but might make small cuts by year-end, projected at 7 bps and 20 bps. The Reserve Bank of Australia forecasts a 30 bps cut by the end of the year. Looking ahead to 2026, the market expects a total easing of 113 bps from the Fed, although there is disagreement between market projections and the Fed’s outlook. For the Bank of Japan, an 18 bps increase is anticipated by year-end. Despite differing opinions within the Bank of Japan, the overall market adjustment has been small, as a rate hike was expected. Governor Ueda has minimized the impact of these differing views. The market is expecting 113 basis points of cuts from the Fed by the end of 2026, which is more aggressive than the Federal Reserve’s own predictions. This disagreement mirrors a similar situation in 2024, when the market expected significant cuts that didn’t occur until later. The recent US jobs report for August showed robust growth with 195,000 new jobs added, suggesting that further signs of economic strength could lead traders to reconsider these anticipated cuts. In Japan, the two dissenting votes for an immediate rate hike indicate that pressure to tighten policy is increasing faster than expected. Although Governor Ueda downplayed this, the market is pricing in a nearly certain 18 bps hike by year-end. This hawkish sentiment could support the yen, especially against currencies from central banks that are leaning towards easing.

Economic Implications

New Zealand’s unexpected 0.3% decline in second-quarter GDP has reinforced expectations for RBNZ rate cuts. There is now a 78% probability of a cut at the next meeting, with a possible significant move of 50 basis points. This positions shorting the New Zealand dollar as an appealing strategy for the upcoming weeks. In Europe, the outlook remains stable, with no major rate changes expected from the European Central Bank, the Bank of England, or the Swiss National Bank this year. Inflation reports from the Eurozone and the UK have shown little movement, allowing these central banks to stay put. Traders may want to consider range-bound or low-volatility strategies for the euro, pound, and Swiss franc. The Bank of Canada and the Reserve Bank of Australia are adopting a dovish stance, but their trajectories are less clear. Market expectations suggest small cuts for both by December, making forthcoming inflation and employment data vital. These positions are not yet strong convictions and should remain flexible as the data will influence future decisions. Create your live VT Markets account and start trading now.

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