The Federal Reserve’s outlook has shifted to a more cautious stance after the latest jobs report. Some traders now think there might be a 50 basis point rate cut in September. By the end of the year, there’s a 91% chance of a 70 basis point cut in the next meeting. In Europe, the European Central Bank expects only an 8 basis point cut, but there’s a 99% chance rates will stay the same next time. The Bank of England anticipates a 12 basis point cut, with a 98% likelihood of no change at its upcoming meeting. Canada is expecting a larger cut of 42 basis points, with an 89% chance of that happening soon. The Reserve Bank of Australia forecasts a 30 basis point reduction and has an 81% chance of keeping rates steady.

Expectations for the Reserve Bank of New Zealand

The Reserve Bank of New Zealand is set to cut rates by 38 basis points, with a 91% chance of this happening at the next meeting. The Swiss National Bank anticipates a small 7 basis point cut but has a 91% chance of keeping rates the same. The Bank of Japan is not expected to change, with a 12 basis point hike possible, but there’s a 97% chance rates will stay unchanged. Last Friday, the US jobs report revealed only 125,000 new jobs, far below the expected 180,000. This disappointing data has led to increased speculation about major rate cuts. The market is now nearly certain a rate cut will occur at the Federal Reserve’s meeting on September 17. Weaker wage growth, which was only 0.2%, also influenced this shift. Traders are now expecting a total of 70 basis points in cuts by the end of the year, suggesting three 25 basis point reductions. Some are hoping for a larger “insurance cut” of 50 basis points this month, similar to what happened in 2024. The chances of such a significant cut have risen to about 9% in futures markets.

Key Focus on US CPI Inflation Report

This week, all eyes are on the US CPI inflation report due on Thursday, September 11. A weak inflation update could encourage the Federal Reserve to implement that larger 50 basis point cut. Consequently, interest rate futures are buzzing with activity as traders prepare for market shifts. It’s not only about the Fed; Canada’s job market also took a hit, losing 10,000 jobs unexpectedly. This has solidified expectations for a second rate cut from the Bank of Canada, which now includes 42 basis points of cuts anticipated by year-end. Such policy differences may create chances for trading currency pairs like USD/CAD. With the discussion around whether to cut by 25 or 50 basis points, we can expect short-term volatility in bond and currency markets to rise. Traders can take advantage of this with options strategies, such as straddles on treasury futures, which are looking more appealing ahead of Thursday’s data. The VIX is around 17 and likely to face upward pressure this week. Create your live VT Markets account and start trading now.

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