Expectations for interest rates among major central banks remain stable. Markets are awaiting policy announcements and key economic reports such as the US NFP and CPI.
Projected rate cuts by year-end are as follows: the Fed is expected to cut by 44 basis points, with a 97% probability of no change at the upcoming meeting. The ECB anticipates a 14 basis point cut, with a 90% probability of maintaining current rates. The BoE might see a reduction of 46 basis points, with an 88% probability of a rate cut. BoC expects a 14 basis point cut, maintaining a 92% probability of no change. Meanwhile, the RBA might cut by 59 basis points, and the RBNZ by 35 basis points, with probabilities of 83% and 72% for rate cuts, respectively. The SNB foresees an 8 basis point cut, with an 86% chance of rates staying the same.
Focus Shifts To The Fed
The BoJ expects a 19 basis point rate hike, with a 98% probability of no changes. Since early April, tariffs have played a role in the economic situation, but attention is now shifting towards the Fed. Economic data and guidance from the Fed are anticipated to dominate the remainder of the year’s economic focus.
With major central banks holding steady for their upcoming meetings, we see the market is in a holding pattern. The old news about tariffs and political bills has been fully absorbed, leaving a vacuum for the next major driver. We believe the focus for the rest of the year will pivot entirely to economic data and the Federal Reserve’s guidance.
The Fed is now the main event, especially with markets pricing in 44 basis points of cuts by the year’s end. The last US Consumer Price Index report for June 2025 came in slightly sticky at 3.4%, while the jobs report showed a solid but not spectacular 195,000 new jobs. This mixed data keeps traders guessing and heightens the importance of the next Non-Farm Payrolls and inflation prints in August.
Preparing For Increased Volatility
Given this uncertainty around the Fed’s next move, we think traders should prepare for a spike in volatility. Using options to buy straddles or strangles on major instruments like the SPX index or the EUR/USD currency pair ahead of these key data releases could be a good strategy. This allows a trader to profit from a large price move in either direction.
We are also watching the high probability of rate cuts from the Bank of England, the Reserve Bank of Australia, and the Reserve Bank of New Zealand. Recent UK retail sales data for June showed an unexpected decline, while Australia’s latest quarterly inflation cooled more than forecast, supporting the case for easing. This makes shorting these currencies against the US dollar an attractive position.
To act on this, we are looking at derivatives that benefit from falling interest rates in these countries. Interest rate swaps could be used to position for lower policy rates from the BoE and RBA. We also see continued weakness in currency pairs like GBP/USD and are using put options to express this view with defined risk.
The Bank of Japan remains the clear outlier, with the market pricing in a 19 basis point rate hike by the end of the year. This view is supported by Japan’s core inflation, which has now remained above the 2% target for 18 consecutive months, a level not seen in decades. This policy divergence from the rest of the G7 nations is a powerful theme.
This makes shorting the Japanese Yen a compelling trade through the second half of the year. We are positioning for this by looking at long trades in pairs like USD/JPY and even AUD/JPY, where one central bank is cutting while the other is looking to hike. Using call options on these pairs can help manage the risk of any sudden policy shifts from the BoJ.
