Expectations for interest rates among major central banks indicate that rate cuts may happen by the end of the year. The Federal Reserve is projected to lower rates by 59 basis points, with a 93% chance of a cut in the upcoming meeting. The European Central Bank is expected to decrease rates by 14 basis points, with a 92% chance of no changes soon. The Bank of England may cut rates by 49 basis points, with a 96% probability. The Reserve Bank of Australia has the largest anticipated cut at 65 basis points, boasting a 99% certainty.

The Bank Of Japan Outlook

Conversely, the Bank of Japan is likely to raise rates by 13 basis points, maintaining a 92% probability of no changes in the next meeting. Changes in Federal Reserve expectations have affected other central banks due to how the US economy influences global markets. There is an expectation of at least two rate cuts by the year-end, with some even considering a third. Initially, the market expected a 35 basis point cut before the Non-Farm Payroll (NFP) report, but expectations have shifted to a 59 basis point cut. After the latest NFP report, which revealed only 95,000 jobs added in July—a much lower figure than anticipated—there has been a significant shift in central bank expectations.

Recent Market Reactions

Currently, markets are pricing in 59 basis points of Fed cuts by year-end, a notable increase from the previous 35 basis points before the jobs report. With June’s Consumer Price Index (CPI) inflation dipping to 2.8%, there is now a 93% chance of a rate cut in September. This indicates confidence that at least two cuts will occur before 2026. This sentiment has had a global impact, as is common when the Fed changes its course. Expecting aggressive easing, the market anticipates cuts from the Bank of England (49 bps) and the Reserve Bank of Australia (65 bps) in their next meetings. We believe the market may have overreacted to a single NFP report, which could present an opportunity. This is similar to moments in 2023 when traders anticipated policy changes that didn’t materialize as quickly as they thought. In the coming weeks, watching for signs of economic strength could challenge this new dovish outlook. Derivative traders might explore strategies that benefit if the dovish sentiment fades. This could include looking at options on interest rate futures that would be profitable if the market reduces its expectations for a third cut. If economic activity picks up after an initial rate cut, this mean-reversion trade could yield gains. Create your live VT Markets account and start trading now.

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