How have interest rate expectations changed after this week's events?
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.
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
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Key takeaways
- 01Central banks are signaling a commitment to tightening despite geopolitical tensions.
- 02RBNZ and ECB show strong probabilities for rate hikes by year-end.
- 03Market expectations for BoJ and SNB rate hikes may be mispriced.
- 04The Fed's easing bias could shift if geopolitical conditions stabilize.
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.
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: 42 bps (95% probability of no change at the next meeting) RBA: 35 bps (82% probability of no change at the next meeting) SNB: 16 bps (92% probability of no change at the next meeting) Fed: 2 bps (97% probability of no change at the next meeting) We can see that the hawkish expectations haven't changed much this week as the US-Iran stalemate remains in place despite some hopes for a deal. The Fed is no longer seen cutting this year, but I'm afraid that could change quickly with the reopening of the Strait of Hormuz and falling oil prices. There's a constant easing bias that is absolutely not justified by fundamentals.
It's still laughable to see the SNB being higher than the Fed in tightening expectations. I think expectations for the BoJ are also mispriced. There's no reason for the central bank to hike in June, all else being equal.
Governor Ueda made it pretty clear that they will need to wait a few more months before deciding on the next rate hike. In any case, the expectations continue to be driven mainly by US-Iran developments, but I feel like we are reaching a point where the Fed will start to place more emphasis on the data if the situation in the Strait of Hormuz doesn't change. There is already a slow but steady change in stance and we might not be far from the Fed abandoning completely the easing bias.
This article was written by Giuseppe Dellamotta at investinglive.com.
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