How have interest rate expectations changed after this week's events?
At a Glance
The desk believes that interest rate expectations remain largely unchanged despite geopolitical tensions, with central banks maintaining a hawkish stance. Per the full note source, the RBNZ is projected to hike rates by 83 bps by year-end, while the ECB shows a 77% probability of a hike at its next meeting. This aligns with our view that the Fed may soon pivot away from its easing bias, especially if geopolitical conditions stabilize. However, the market's current positioning appears overly optimistic regarding rate hikes from the BoJ and SNB, which may not materialize as expected.
Key Takeaways
Full Analysis
What the desk is arguing
The desk posits that despite ongoing geopolitical uncertainties, particularly regarding US-Iran relations, central banks are signaling a commitment to tightening monetary policy. Per the full note source, the RBNZ is expected to raise rates by 83 bps by year-end, while the ECB has a 77% probability of a hike at its next meeting.
Supporting this view, the BoE and BoJ also show significant rate hike expectations, although the desk questions the validity of these projections given recent comments from central bank officials. For instance, the BoJ's Governor Ueda has indicated a need for further data before considering a rate hike, suggesting that current market expectations may be mispriced.
The alternative read would be to consider that if geopolitical tensions escalate, central banks might adopt a more cautious approach, which could lead to a reassessment of rate hike probabilities across the board.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan and citi, which are positioned at the higher end of the target range, while bofa presents a more cautious outlook at the lower bound.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's hawkish outlook, suggesting that rate hikes are imminent and necessary to combat inflation. Conversely, bofa and goldman maintain a more dovish stance, indicating skepticism about the sustainability of current rate hike expectations.
Watch the EUR/USD trajectory closely as it reflects the ECB's rate path, and consider the implications of BoE decisions on GBP/USD as well.
What the calendar says
(omit this section entirely if no upcoming events)
Market Implications
Traders should monitor the EUR/USD for movements reflecting ECB rate expectations, particularly as the next meeting approaches. A break above 1.08 could signal stronger bullish sentiment towards the euro.
From the original
Rate hikes by year-end RBNZ: 83 bps (67% probability of no change at the next meeting) ECB: 60 bps (77% probability of rate hike at the next meeting) BoE: 52 bps (64% probability of no change at the next meeting) BoJ: 42 bps (64% probability of rate hike at the next meeting) BoC:
Related speeches
4 itemsHow have interest rate expectations changed after this week's events?
RBNZ set to hold at 2.25% but majority now see hikes coming by end-September
RBNZ preview: A closer call than markets expect
The desk anticipates a potential interest rate hike at the Reserve Bank of New Zealand's upcoming meeting on May 27, although it acknowledges that the RBNZ's tendency towards dovishness may lead to a 'hawkish hold'. Per the full note from ing-think, there is an underappreciated risk of tightening, with expectations suggesting the first of two hikes could occur as early as July. With external factors likely to drive NZD movements, market participants should remain vigilant. Supporting arguments for a hike include evolving inflation data suggesting underlying pressures and a global economic recovery, particularly as the RBNZ has previously suggested readiness to act if necessary. As such, new projections could indicate a tightening cycle starting in Q3, reflecting a shift in the central bank's stance. While the desk leans towards anticipating these hikes, it implicitly dismisses the counter viewpoint that favors a prolonged period of policy accommodation—arguing instead that inflationary pressures are likely to prompt action sooner rather than later.
RBNZ preview: A closer call than markets expect
The desk views the upcoming Reserve Bank of New Zealand (RBNZ) policy decision as more contentious than current market pricing suggests. Per the full note from ING Economics, the RBNZ's monetary policy deliberations could hinge on recent inflation data and the broader economic outlook, potentially challenging expectations for a steady approach. With the RBNZ's OCR currently at 5.50%, the risk of a hawkish surprise looms should inflationary pressures remain persistent, as highlighted by a recent CPI reading showing 6.1% year-on-year growth. The absence of scheduled economic events complicates the current landscape, leaving traders to navigate evolving macroeconomic indicators in lieu of formal guidance.
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