Summer of Easing: Central Banks Turn the Heat Dial Down
When summer’s sunshine brightens the skies, it also signals that central banks are likely to start loosening policy. The policy normalisation cycle is tipped to kick off, nudging risk assets higher and giving the dollar a little boost.
First Cut of the Season
In a surprising early‑summer move, the Swiss National Bank (SNB) became the first G10 central bank to trim rates at its March meeting. Their domestic inflation now hovers near the bottom of the target band, making a cut look almost inevitable.
Other G10 Banks: The Dazzling Countdown
- European Central Bank (ECB) – almost ready for a June cut, although still keeping the “data‑dependent” pretext.
- Bank of England (BoE) – Governor Bailey pointed out that future meetings will likely feature rate cuts.
- Federal Open Market Committee (FOMC) – seems eager to start easing early summer, with the latest policy outlook hinting at unchanged rates but signalling 75 bp cuts this year.
- All other G10 banks remain poised to follow suit in the coming weeks.
Equity Volatility – A Calm Sea
With monetary policy becoming more accommodating, equity market swings should stay relatively mild. Even though there are still risks—geopolitical tensions and stubborn service inflation—looser rates and the end of quantitative tightening act like a blanket, shielding risk assets from sharp hits.
Inflation in Check
Most developed markets are back near the 2 % target. If a bad shock hits, the policy toolbox is ready: more cuts, liquidity injections, a safety net for both the economy and markets. Dips may happen, but they’re expected to be brief and superficial, keeping the overall market slope up.
FX Market: A Mixed Bag
Some flickers of activity have already appeared. JPM’s G7 FX volatility index spiked to a 6‑week high—though most of that was driven by JPY volatility around the Bank of Japan. It’s a taste of what’s to come as easing unfolds.
Policy Divergence – A Trader’s Playground
As we move toward lighter policy, each central bank will march at its own tempo. The ECB and the Bank of Canada (BoC) appear set to ease more than the U.S. Fed, according to current market expectations. The U.S. Fed is more hawkish, with sticky services inflation and hotter‑than‑expected CPI figures.
- ECB – First cut likely in June, but dovish pressure is growing.
- BoC & RBNZ – Fragile property sectors add dovish tilt.
- BoE – Similar dovish concerns.
- Riksbank – may cut as early as May if inflation looks good.
The Dollar’s Edge
With the U.S. Fed holding its own in a sea of dovish peers, we expect yield spreads to swing in favour of the dollar. The U.S. dollar and equities rallying together is rare, but for now, that’s our baseline.
