Interest rate expectations have mostly stayed the same after recent inflation reports. The Federal Reserve is likely to lower rates by 45 basis points by the end of the year, with a 97% chance of no change at the next meeting. The European Central Bank (ECB) is expected to cut rates by 24 basis points, holding a 94% chance of no change. The Bank of England might reduce rates by 51 basis points, with a 77% probability of a cut at the next meeting. The Bank of Canada is predicted to lower rates by 16 basis points, with a 91% chance of no change. Meanwhile, the Reserve Bank of Australia is forecasted to cut rates by 66 basis points, with an 88% chance of a cut.

Central bank rate expectations

The Reserve Bank of New Zealand is expected to reduce rates by 33 basis points, having a 70% chance of a cut at the next meeting. The Swiss National Bank is likely to cut by 11 basis points, with an 85% probability of no action. The Bank of Japan shows a 16 basis point increase by year-end, with a 99% probability of no change at the next meeting. The Federal Reserve seems to have a clearer path, despite some noise from recent data. The market anticipates around 45 basis points of cuts by year-end. The recent spike in the Consumer Price Index was neutralized by lower producer prices, hinting that we may consider selling near-term volatility, as the market appears balanced for now. Across the Atlantic, the Bank of England is in a similar situation, likely looking at about two cuts this year. The market quickly adjusted to higher inflation figures after weaker UK employment data showed cooling wage growth. With a high chance of a cut at the next meeting, we are exploring options strategies on the British pound that could benefit from a dovish shift.

Opportunities and strategies

One of the most significant changes comes from the Reserve Bank of Australia. A surprisingly poor jobs report, which pushed the unemployment rate to a two-year high of 4.1% in January, has strengthened expectations for an immediate rate cut. It’s wise to position ourselves with long holdings in Australian bond futures to take advantage of falling yields. On the other hand, central banks like the European Central Bank appear to be in a stable phase, with markets not expecting major actions soon. We believe they will follow the lead of larger institutions, making direct bets on their policies less appealing for the time being. However, the low cuts anticipated by the ECB could present an opportunity if Eurozone economic data continues to weaken. The Bank of Japan stands out, as we are preparing for a major policy shift away from negative interest rates. With recent major labor agreements showing wage increases above 5%, it seems likely that the first rate hike in 17 years is on the horizon. This makes shorting Japanese government bond futures or buying call options on the yen our top conviction trade. Create your live VT Markets account and start trading now.

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