Due to the Middle East war driving up oil prices and triggering inflation concerns, the currency markets reduced bets on interest rate cuts in the U.S., U.K., and Eurozone on Monday. According to swap trades linked to policy meeting dates, the likelihood of the Federal Reserve cutting rates three times in 2026 has dropped from nearly 50% last week to 20%. Traders no longer expect the Bank of England to cut rates three times this year, lowering the probability of a rate cut in March from over 80% to 60%.
They also halved the probability of the European Central Bank cutting rates this year, pricing in only a 5 basis point rate cut. The rise in two-year yields in the U.S., U.K., and Germany, which are most sensitive to changes in monetary policy, has exceeded that of longer-term yields. This reflects a significant jump in inflation indicators driven by Brent crude oil prices posting their largest increase in four years.
Laura Cooper, global investment strategist and head of macro credit at Newven Investment, stated, "The sustained rise in oil prices will have significant spillover effects on the global economy and inflation trajectory. A more persistent energy pulse could complicate the disinflation process and delay further rate cuts."
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