Markets recalibrated their interest rate expectations this week, with the UN General Assembly and US PMI data driving repricing across major central banks and attention shifting to US-Iran negotiations over the Strait of Hormuz. Rate expectations matter because they feed directly into bond yields, currency moves, and borrowing costs across the economy.

Rate hikes priced in by year-end, in basis points:

• RBA: 41 bps (99% probability of a rate hike at the next meeting); 2027: 65 bps
• Fed: 37 bps (71% probability of a rate hike at the next meeting); 2027: 92 bps
• RBNZ: 37 bps (81% probability of a rate hike at the next meeting); 2027: 125 bps
• BoC: 35 bps (65% probability of a rate hike at the next meeting); 2027: 140 bps
• BoE: 34 bps (80% probability of a rate hike at the next meeting); 2027: 106 bps
• ECB: 33 bps (54% probability of no change at the next meeting); 2027: 99 bps
• BoJ: 21 bps (68% probability of no change at the next meeting); 2027: 99 bps
• SNB: 10 bps (62% probability of no change at the next meeting); 2027: 84 bps

Last week's market pricing here. The 2027 pricing reflects the total amount of tightening expected by the end of 2027, not how much is expected in 2027 alone.

The main events of the week were the UN General Assembly and the US PMIs, and both moved rate expectations visibly.

Heading into the UNGA, oil prices fell significantly on hopes of de-escalation and an earlier end to the Iran war. The selloff in crude helped ease inflation concerns, producing a modest dovish repricing across the board.

Those hopes were dampened after Trump repeated that the US would make a deal with Tehran after the November elections. Oil prices began rising again following his remarks as the market repriced the estimated timeline for the end of the conflict, and the resulting hawkish shift essentially erased the earlier dovish bets.

On Wednesday, rate hike bets for the Fed increased following a much stronger-than-expected US PMI report. PMIs — surveys of purchasing managers that offer a timely read on business activity — are closely watched for early signals on growth and price pressures. The probability of a rate hike in October jumped to 70%, with traders expecting the Fed to bring hikes forward given the central bank's focus on a "timelier return to the 2% target."

Looking ahead, focus will remain on US-Iran developments, especially now that hopes for a deal have strengthened after reports that the US and Iran are discussing a phased agreement to reopen the Strait of Hormuz and end the US blockade. The strait is a critical artery for global oil shipments, which is why its status is so closely tied to crude prices — and through them, to the inflation outlook that central bank pricing hinges on.

Iran has put an offer on the table, promising to reopen the Strait of Hormuz within seven days if the US meets its terms. Iranian Foreign Minister Araghchi is staying in New York over the weekend to await a US response.

A breakthrough in negotiations would send oil prices quickly lower, while a prolonged stalemate — or a re-escalation — should keep the oil market supported.

Trump is facing many constraints at the moment, and an end to the war is more likely than not. The only open question is the timeline.

Source: ForexLive