As markets stabilise, expectations for rate cuts have been adjusted. Traders have reduced aggressive projections due to recovery in the stock market and optimism surrounding tariff deals.
Current anticipated rate cuts by year-end are 96 bps for the Fed, with a 61% chance of no change at the next meeting. The ECB, BoE, BoC, RBA, RBNZ, and SNB show probabilities for rate cuts of 93%, 94%, 66%, 94%, 76%, and 53%, respectively.
Central Bank Predictions
Conversely, the BoJ is expected to make no changes with a 98% probability of maintaining its rate.
Rate cut speculation has followed stock market trends, influencing consumer and business confidence. The market’s recovery is likely to continue affecting these expectations in the coming days.
So far, markets have grown less reactive as immediate shocks from earlier policy tightening fade into the background. With that, optimism driven by improving equities and early-stage agreements on tariffs has caused a pullback in just how much rate relief traders are now pricing in. That’s why projections have softened.
To clarify, the original figures suggest investors are broadly paring back expectations for aggressive action by central banks. For example, in the United States, the target is now a net reduction under 100 basis points through year-end, illustrating how quickly rate bets have moderated after a market rebound. Similarly, in Europe, England, and Canada, implied probabilities lean heavily towards modest easing, yet with decreasing conviction in rapid cuts. Australia and New Zealand show a similar tilt, and Switzerland less so. What’s different with Japan is the near-certainty—98% probability—of no move at all.
That said, all of it has been driven largely by the performance of equity markets rather than hard data. We’ve seen before how sentiment from rising equities either reinforces or dampens bets on monetary policy shifts. This time again, confidence has returned faster than the hard numbers support, and traders have latched onto that.
Market Sentiment and Strategies
Now, what should we do with all of this? First, observe how last week’s pricing shapes trading desks’ positioning. Option skews and implied vols have already flattened out for front-month interest rate contracts, which means uncertainty is not as concentrated as it was a fortnight ago. That’s something we should not ignore.
Second, continue watching terminal rate pricing. For the Fed, note the compression that’s happened there. Without further upside in earnings or consumer spending, it’s unlikely rate bets will stay this restrained beyond June. So it’s important to be flexible and adjust if the data starts to turn.
In Europe, Lagarde’s credibility with markets has helped maintain expectations near current levels, but inflation prints through July might not co-operate. If that happens, expect the cut probabilities to swing around more aggressively than they have done recently. Bailey, meanwhile, is navigating an economy that’s flirting with contraction. The pricing now seems relatively fair, but tight employment data could force some repricing near the August window.
Canadian rates are already pricing high odds of easing, but oil hasn’t moved enough to disrupt this yet. Hours worked and full-time employment figures out next week will be more important than trade readings — we’ll be watching both. For the other commodity-linked names, like the Reserve Banks of Australia and New Zealand, central bank commentary carries more weight than it typically does, so transcripts from the next pressers need to be kept within reach.
And remember, it isn’t just about rates. As credit conditions improve and risk appetite continues, yield curve trades that worked well last season may begin to underperform. That means we might need to rotate into shorter-duration expressions or flatteners that benefit if rates are kept on hold just a little longer than consensus believes.
We’re following rate pricing, sure. But beyond that, positioning shows most are cautious now, with short-dated skew being closely watched — indicating fear but limited directional conviction. That tells us more than it should.
So, forward guidance becomes less helpful — traders should look through that and act based on positioning extremes and shift with volatility, not with committee statements. Reaction, not prediction, gives better results during transitions like this.
