Declaring Independence From the U.S.

Dollar strength resulting from central banks' independent policies on rate cuts is unlikely to be tampered by China's deflation or geopolitics.

The Federal Reserve looks to emerge as a global outlier on policy interest rates, likely cutting rates later in this cycle than other major central banks. As the Fed delays the start of cuts, other central banks are declaring independence from the U.S.'s Fed with the European Central Bank's (ECB) Lagarde making that clear in the press conference following the April meeting when she explicitly stated, "We are not Fed dependent." The heads of the Bank of Canada (BOC) and the Bank of England (BOE) also expressed similar sentiments last week. And March saw Swiss officials delivering the first interest rate cut of the current cycle by a central bank with one of the world's 10 most-traded currencies and is expected to lower rates again in June.

Diverging paths

The odds of a 25-basis-point (bp) rate cut by the Fed in June have come down from a "sure thing" at the start of the year to merely a 15% chance in the eyes of the interest rate futures market. At the same time, the odds remain well over 50% for other major central banks, as you can see in the chart below.

Market-based percentage likelihood of a rate cut in June

Market-based percentage likelihood of a rate cut in June

Looking past June, the outlook for the number of rate cuts priced in for all of 2024 has slipped from between six to seven at the beginning of the year to between one and two for the Fed, and between three and four for the ECB, as you can see in the chart below.