Week ahead – Markets brace for central bank barrage amid heightened uncertainty [Video]

• Fed officials to stand pat as they await further clarity.

• A dovish BoJ could push rate hike expectations into 2026.

• Deflation fuels speculation about negative SNB rates.

• BoE may sound more dovish after disappointing UK data.

Fed expected to stand pat – Mind the dots

Risk appetite remained supported during the first half of the week as the US and China agreed on a framework to implement the accord reached in Geneva last month. However, despite the S&P 500 and the Nasdaq getting closer to their record highs due to hopes that tariffs will not distort the economic outlook that much, the dollar was unable to recharge.

Perhaps this was because investors lost their trust in the world’s reserve currency, or because they preferred to abstain from buying it ahead of the CPI data. Indeed, after the lower-than-expected CPI numbers were out, the dollar slipped further and accelerated its slide on Thursday after US President Trump said that he would send out letters in one to two weeks to other countries, outlining the terms that they could accept or reject. Equities pulled back and extended their slide after Israel attacked Iran’s nuclear facilities.

The latest development is an extra set of worries for investors as following Israel’s attack, Iran already responded launching more than 100 drones. The rally in oil prices and the gains in safe-haven assets suggest that there is elevated anxiety about whether there will be further escalation in the coming days.

All this uncertainty is leaving investors scratching their heads as to how the Fed may proceed from here onwards and thus, next week’s gathering may be eagerly awaited. Just after the relatively decent NFP report and ahead of the CPI numbers, investors were penciling in around 42bps worth of rate cuts by the Fed this year, which is one of the very few times they turned slightly more hawkish than the Fed itself. However, after the inflation data was out, they went back to factor in 55bps worth of cuts.

No action is expected on Wednesday and thus, the spotlight is likely to turn to the accompanying statement, Fed Chair Powell’s press conference, and the updated macroeconomic projections, including a new ‘dot plot’. With fears of a recession abating, policymakers have been signaling that they are in no rush to further lower interest rates, as the heightened uncertainty due to trade- and tariff-related developments could still impact employment and prices. Yes, inflation numbers for May came in lower than expected, but the headline rate actually rose to 2.4% y/y from 2.3%, and the core held steady at 2.8%, well above the Fed’s objective of 2%.

This corroborates the notion that policymakers should stay patient, but it is unclear whether they will continue to signal two rate cuts or switch to just one. According to Fed fund futures, there is a strong 95% chance for September action and then a follow-up cut in December.

So, if dot plot points to only one quarter-point rate cut by December, the dollar is likely to shoot higher. The dollar could also strengthen even if officials continue to point to two rate cuts, as long as they sound hawkish enough to convince market participants to push back the timing of when they expect the first one. This may be the most likely outcome. For the dollar to extend its prevailing slide in the aftermath of the decision, the Fed may need to convince investors to price in the next rate cut before September.

Will the BoJ push the next rate hike into 2026?

Ahead of the FOMC decision, during the Asian session  on Tuesday, the BoJ will announce its own monetary policy decision. At its latest meeting, on May 1, the Bank held interest rates steady, and downgraded both its growth and inflation forecasts. At the press conference, Governor Ueda highlighted the uncertainty surrounding the trade landscape, noting that the timing of the next increase will depend on related developments.

The stickiness in Japan’s inflation allowed investors to price in a more-than-50% chance of another 25bps rate increase, but more recently, Governor Ueda repeated that uncertainty surrounding Japan is very high, while a former policymaker said just yesterday that US President Trump’s tariffs may have put an end to the BoJ’s rate-hike cycle.

Therefore, although the Bank is widely anticipated to remain on hold at this meeting, yen traders are likely to keep their gaze locked on the forward guidance. Policymakers are likely to keep the door to future hikes open due to elevated inflation, but should they place extra emphasis on proceeding cautiously and with no rush, investors could push the timing of the next rate hike into the first quarter of 2026. Something like that could weigh on the yen.

The National CPI data for May will be released during the Asian session on Friday.

SNB dilemma: To cut by 25 or 50bps?

On Thursday, it will be the turn of the SNB and the BoE to make their monetary policy decisions public.

Getting the ball rolling with the SNB, a rate cut is fully priced in, but the big question is whether the size will be 25 or 50 basis points. Currently, the Bank’s benchmark rate is at 0.25%, which means that Switzerland could become the first advance economy to return to a negative interest rates regime, should policymakers decide to proceed with the bolder reduction.

The latest CPI data revealed that consumer prices fell by 0.1% year-over-year in May, mainly driven by large declines in household goods and services, as well as in transport costs. This is the first deflationary month since March 2021, which combined with a subdued economic outlook, has prompted market participants to assign a 20% chance of a 50bps rate cut.

Thus, in contrast to the other Banks, the SNB’s rate decision could directly impact the market. In case officials choose to take interest rates into negative territory, the franc is likely to tumble as the decision would likely disappoint those expecting a smaller 25bps reduction. Otherwise, in the case of a 25bps cut, the franc is likely to gain, but only slightly.

Weak UK data make BoE rate cuts more likely  

Flying to the UK, following the weak labor market report, Thursday’s data revealed that the economy contracted 0.3% month-over-month in April, with both the industrial and manufacturing production rates slipping into negative territory as well.

This was the worst monthly drop since October 2023, and despite the BoE sounding cautious about interest rates cuts when it last met due to sticky inflation, it raised bets that another 52bps worth of reductions may be needed before the turn of the year.

Yet, the Bank is expected to stand pat when it meets on Thursday, after cutting interest rates by 25bps at its previous decision. The next reduction is fully priced in for September, but a potential slowdown in Wednesday’s CPI data could intensify speculation for a dovish message on Thursday, which could push the pound lower. Yes, the British currency remains in an uptrend mode against its US counterpart, but this is because the US dollar is suffering more than the pound; not because the pound has shrugged off the latest streak of disappointing data. Sterling’s wounds are more evident in the euro/pound exchange rate.

New Zealand GDP and Australia’s jobs report also on tap

Elsewhere, New Zealand’s GDP for Q1 will be released during the Asian session Wednesday, and Australia’s employment report for May on Thursday. According to New Zealand’s Overnight Index Swaps (OIS) market, the RBNZ is expected to cut by another 25bps and end its rate-cut cycle, while the RBA, which started at a much later stage, is anticipated to deliver another 100bps by May 2026. Therefore, should the data further widen this divergence, the aussie/kiwi pair is likely to extend its prevailing downtrend.