Interest rate expectations across major central banks were largely unchanged this week, as a lack of major economic and policy developments left traders with little reason to adjust their outlooks. Market pricing for policy tightening expected by year-end — and the probability of a move at each central bank's next meeting — stands as follows:

• Bank of England: 35 bps (86% probability of a rate hike at the next meeting); 2027: 105 bps
• Reserve Bank of New Zealand: 33 bps (59% probability of a rate hike at the next meeting); 2027: 109 bps
• US Federal Reserve: 25 bps (80% probability of no change at the next meeting); 2027: 80 bps
• Bank of Canada: 21 bps (74% probability of no change at the next meeting); 2027: 105 bps
• European Central Bank: 21 bps (81% probability of no change at the next meeting); 2027: 69 bps
• Bank of Japan: 18 bps (92% probability of no change at the next meeting); 2027: 90 bps
• Reserve Bank of Australia: 12 bps (74% probability of no change at the next meeting); 2027: 24 bps
• Swiss National Bank: 7 bps (72% probability of no change at the next meeting); 2027: 59 bps

Last week's market pricing is available here. The 2027 figures indicate the total amount of tightening expected by the end of 2027, not the amount expected in 2027 alone. Because these market-implied paths feed into currency valuations and bond yields, shifts in them can ripple across FX and fixed-income positioning even when policy outcomes stay on hold.

The main source of volatility came from geopolitics. Reports that President Donald Trump was weighing military strikes against Iran ahead of the midterm elections triggered a slightly hawkish repricing. However, comments posted on Truth Social on Thursday, in which Trump ruled out attacks before the midterms and pointed to productive discussions with Tehran, helped reverse part of the move as oil prices pulled back. The sensitivity of rate pricing to oil reflects the channel through which energy costs feed into the inflation readings central banks weigh when setting policy.

The most notable repricing came from Canada after Friday's much weaker-than-expected employment report. Employment fell by 68.3K in September, compared with expectations for a 9.2K increase. The data reduces pressure on the Bank of Canada to tighten policy, and the probability of a rate hike at the October meeting dropped to around 21%, down from 42% before the release.

Geopolitical developments will remain a key driver of rate expectations in the days ahead, with markets awaiting Iran's response to the US proposal. A positive diplomatic outcome could push oil prices lower and trigger further dovish repricing across central banks, while renewed tensions could keep hawkish expectations intact.

Beyond geopolitics, attention will turn to next week's US CPI report, a widely watched of US inflation that factors into the Federal Reserve's assessment of price pressures. The release could shape expectations for the Fed and spill over into global rate pricing. A hotter-than-expected print could lift October rate hike probabilities, while soft data would reinforce the case for a more patient approach.

Source: InvestingLive