As markets stabilise, aggressive rate cut bets are being scaled back, reflecting a more positive risk sentiment. Central banks around the world have varying expectations regarding rate cuts by the end of the year.
The Federal Reserve is expected to cut rates by 81 basis points, with a 76% probability of no change at the upcoming meeting. The European Central Bank has a high probability of a rate cut, estimated at 76 basis points with 99% certainty. The Bank of England anticipates a 75 basis point reduction, with a 93% chance of occurring.
Other Central Banks’ Rate Decisions
For other central banks, the Bank of Canada could see a 40 basis point cut, while the Reserve Bank of Australia expects a 118 basis point reduction, with high odds for a 25 basis point cut at the next meeting. The Reserve Bank of New Zealand is likely to cut by 77 basis points, with a 97% probability, and the Swiss National Bank foresees a 25 basis point cut with a 74% likelihood.
In contrast, the Bank of Japan stands apart, expecting a rate hike of 10 basis points by year-end, with a 99% probability of no change at the next meeting. This illustrates adjustments in trader expectations for rate movements.
Taken together, these figures suggest that the wave of aggressive easing predicted earlier in the year is beginning to recede. Risk premiums are softening, and confidence appears to be bleeding into rates markets, even as divergence grows between global policy paths.
Powell’s central bank now appears to be leaning toward a more patient stance. An 81 basis point pricing suggests traders do foresee some reduction this year, but the probability of no change at the next meeting remains elevated. This aligns with inflation data that, while gradually improving, has not yet met consistency thresholds for immediate action. Options positioning on shorter-dated contracts reflect this patience — implied volatility has come down from mid-year highs, and skew has rebalanced in recent weeks.
Monetary Policy Actions and Market Responses
Lagarde’s institution, on the other hand, looks firmly positioned to proceed with easing as early as the upcoming quarter. With markets assigning near-certainty to a substantial cut, movements in the euro curve show compressed term premiums and a tighter spread between the front end and belly. Volatility remains low. We’re already noting increased use of calendar spreads to express views without overt directional exposure.
Bailey’s forward guidance appears to be gaining market trust. Despite ongoing wage pressure and spotty growth indicators, sterling rates pricing supports a coherent path of easing. The 93% chance of action has been translating into tactical steepeners and diagonal structures, especially among medium-term options. Engagement has been cautious, but consistent.
In North America, Macklem faces tighter margins. The modest 40 basis point forecast points to divided sentiment. Interest remains focused on employment reports and consumption metrics moving into July, which could tilt sentiment either way. Futures pricing suggests expectations are reactive rather than anchored, making gamma plays more likely to outperform over straight delta risk.
At the antipodean ends, Bullock’s team has a more aggressive easing path priced in — 118 basis points is not immaterial. However, the odds for near-term change focus on a single 25 basis point move, indicating the deeper cuts are projected further out. That creates a layered profile for trade construction. We’re seeing increased interest in deferred binaries and ladder trades.
Orr’s guidance continues to reinforce expectations of a slower growth profile, with 77 basis points in cuts deemed by markets as highly likely. The supportive probability suggests the near-term is not in question, leaving most taking positions further down the curve. Swaption vol is being used to moderate downside scenarios without taking large outright risk.
Jordan’s institution is the most predictable of this cohort, with traders assigning three-quarters probability to a single 25 point cut. That sort of clarity leaves little immediate edge in outright plays. Instead, relative value trades versus the euro or sterling curves have become more appealing.
In Asia, Ueda’s bias toward hikes — albeit minor — stretches the contrast. Markets view policy as essentially on hold for now, but with a subtle lean upward. Volumes have risen in rate options tied to 10-year JGBs, and we’ve seen carry trades begin to shift back toward the yen. Those immersed in curve steepeners have started rotating gradually, reducing exposure to aggressive widening.
The general takeaway is that compression in implied volatility across major economies does not mean parity of outcomes. Rate path divergence remains pronounced. For us, this means a focus on expressions that gain from spread widening and volatility re-pricing — especially where forward guidance has created an illusion of stability. That illusion, historically, does not tend to last.
