Weekly Investment View: Is the Fed a Done Deal?

This Week

• US Macro – Dominique expects the Fed to maintain its wait-and-see stance.
• US Rates – Antonio still expects the US economy to slow due to tighter financial conditions. He looks to buy STIR again at cheaper prices.
• EM Macro – Caroline expects a hawkish tone at Thursday’s SARB meeting, with the bar for another cut high.
• China – Liang expects a deteriorating basic balance will weigh on RMB in the months ahead.
• EZ and UK Macro – Henry expects the BoE on hold this week but to cut at least another 100bp this year.
• G10 FX – Ben thinks EUR is overbought into the Fed and is short EUR/NZD.
• Japan – Viresh expects the BoJ on hold and thinks the sell-off in long-end JGBs has been excessive, presenting opportunities to be long on an RV basis

Go to Appendix: Trade Table

Dominique Dwor-Frecaut – US Macro

I expect the Fed to maintain a wait-and-see stance. Chair Powell set out this stance just before the pre-meeting blackout in Fed communications. The economy is strong, inflation remains above target, and he needs more information on the net effects of administration policies.

Subsequent inflation and growth data has been consistent with this stance. And while the market selloff has deepened since Powell last spoke, he is likely to state that changes in financial conditions must last long enough to impact to impact the economy.

Antonio Del Favero – US Rates

The market expects the two main dots in the SEP (2025 and 2026) to remain the same. SOFR Dec25 is priced almost at 3.8%, slightly below the current 2025 dot at 3.9% (two cuts). Roughly from Jun26 onward, the market starts to price higher yields vs SEP dots: from about 3.6% (SOFR Jun26) to about 3.8% (SOFR Dec28) vs the current SEP dot (3.4% in 2026, 3.1% in 2027, 3.0% longer run). The terminal rate is priced at about 3.95%, quite a bit higher than the SEP dots.

Our base case is no major changes in dots, economic projections, or presser. The first paragraph in the statement could just be updated to reflect recent economic developments. We think the longer-run dot will increase marginally from 3.0% to 3.1%. The Fed is clearly on hold, and we do not expect the Fed to pause QT at this meeting.

No change in any view – I still expect the US economy to slow due to tighter financial conditions even if now the slowdown is a consensus view. February data, like the jobs report, remains fine, probably reducing on the margin the chances of an outright dovish Fed. I am still looking to buy STIR again at cheaper prices.

Caroline Grady – Emerging Markets

We expect a hawkish tone at Thursday’s SARB meeting. Updated SARB inflation forecasts will incorporate the recently announced two-stage VAT hike. Meanwhile, rising fiscal uncertainty and a rise in inflation expectations will leave upside risks to the new forecasts.

A fourth consecutive cut after the 25bps in each of September, November and January also seems unlikely given geopolitical risks have risen with the expulsion of South Africa’s ambassador to the US, tariffs threats remain elevated and domestic politics is increasingly noisy.

Any significant downside surprise on Wednesday’s CPI release, or a particularly dovish tone from the Fed, could soften the SARB’s hawkishness. So could the recent terms of trade gains. But the bar for another rate cut looks high.

Liang Ding – China

CNH is up 1.5% vs USD since the US 2Y yield peaked two months ago, but the appreciation has lagged most major currencies. The PBoC has kept the daily USDCNH mid-rate barely moved, while USD scarcity has remained elevated in the onshore market.

The first US-China trade war showed a higher USDCNH need not contradict our view of declining US yields and weaker USD amid imbalanced FX demand and supply (Chart 5).

February FX settlement and trading data show reduced capital flight by households, but exporters remain very concerned about a weakening RMB. On 17 January, we initiated a USDCNH call spread (long strike at 7.50, short strike at 7.60, expiry in May). We retain the position given good optionality and because we expect a deteriorating basic balance will weigh on RMB in the months ahead.

Henry Occleston – Eurozone & UK Macro

We expect the BoE on hold at 4.5%, with Dhingra, Taylor and Mann voting for another cut. Mann could vote for a 50bp cut again. Our BoE LLM sentiment index supports her fear that transmission to financial conditions has weakened (Chart 5). We would give such an outturn little weight unless the minutes suggest her views are gaining traction.

We expect little change in the statement:

• The GDP beat in January may be mentioned – expect the tone remains pessimistic.
• There may be reference to the recent inflation beat. But as it came in food and rental prices, we expect they will continue to note domestic pressures moderating.
• We expect they will remain ‘gradual and careful’ on cuts.

The last point is important. While the economy is flatlining, and despite our view that far more easing is needed, the MPC are unlikely to see the urgency in cutting soon as they:

• Need to see whether one-off price rises have longer-term impacts.
• Need to understand the price and labour market effect of employer NIC rise (April), and any subsequent spending cuts (expect June).
• Remain uncertain whether stagnation is supply (hawkish) or demand (dovish) driven.

We expect the BoE to cut 25bp again in May, consistent with the quarterly cycle, before accelerating to a cut every meeting from August (or June if data collapses more suddenly).

Therefore, we still expect the BoE to cut at least another 100bp this year. We remain long SFIZ5 and positioned for 2s10s gilt steepening in our model portfolio.

Ben Ford – G10 FX

Ready for a hectic week? US retail sales arrived ahead of data bombs on Wednesday and Thursday. Meanwhile, major central banks will update monetary policy – Dominique’s Fed preview and Henry’s BoE preview – across Wednesday and Thursday, alongside the SNB and Riksbank. Finally, we had Bundestag readings today ahead of the Bundesrat vote (Friday). Oh, and Trump is meeting with Putin today!

We see a story in market positioning around EUR/USD:

1. EVERYONE is long! We get that impression talking to clients. But elsewhere, the BofA FX and Rates Sentiment Survey registered the sharpest jump in EUR positioning and sentiment in survey history.
2. Volumes have soared. The amount spent on EUR/USD option premiums (over a week) soared close to $345bn. It has led to one-to-three-month options becoming the preferred maturity profile, overtaking longer-term options for the first time in at least a year. All outlooks are extremely net bullish.
3. Investors will want EUR/USD above 1.0950, at least. While there was 1.09 strike EUR/USD call buying over the past week, 1.0950 was far more popular (Chart 6).

Viresh Kanabar – Japan

We expect the BoJ to maintain its current policy stance at tomorrow’s meeting. In addition, mixed economic signals provide little impetus for a more hawkish or dovish shift. We think the sell-off in long-end JGBs has been excessive, presenting opportunities to be long on an RV basis.

Hawkish Factors:

• Shunto wage negotiations were strong, including for small and medium-sized businesses.
• Headline inflation continues to rise, led by higher food prices – particularly rice.

Dovish Factors:

• Consumption data has been weak, declining by 6.8% annualised over the past three months, driven primarily by reduced spending on goods.
• It is now clear the US will implement tariffs against Japanese automobiles and other exports after negotiations failed to prevent new trade barriers.

Ueda to Strike a Cautious Tone

The BoJ faces a challenging environment. Inflation remains elevated, driven by supply-side factors, while the economic growth outlook has deteriorated, potentially impacting hiring and corporate investment decisions.

We expect Governor Ueda to strike a cautious tone during the press conference. He will likely emphasize domestic conditions remain fundamentally robust, with strong wage growth potentially allowing the BoJ to look through temporary weakness in household spending. However, the language regarding consumption may be downgraded from being on a ‘moderately increasing trend.’

Ueda is unlikely to provide a significant impact assessment of US tariffs. Instead, he could highlight the need for clarity and further analysis of potential consequences. We do not anticipate further details on the BoJ’s view of the neutral rate at this meeting.

Market Implications

Rising JGB yields have attracted significant market attention. European rate beta may have been responsible for c. 50% of the move. Since February, the 2s10s JGB curve has steepened to almost 70bps, which we consider excessive. A flatter yield curve would be more appropriate for a central bank maintaining a gradual hiking path while facing downside growth risks.

We expect 10 and 30-year JGBs to catch a short-term bid from the GPIF and other domestic pension funds looking to rebalance following the recent rates sell-off. We would play this on an RV basis.

Appendix

Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	18-Mar-25	Short EUR/NZD	Click here	1.879	1.920	1.800	1.879	0.0%
	15-Mar-25	Long NOK/SEK (50% position)	Click here	0.953	0.925	1.000	0.953	0.0%
	21-Feb-25	Short DXY (50% position)	Click here	105.080	107.900	100.500	103.597	0.7%
	21-Feb-25	Long GBP/JPY	Click here	189.740	186.000	200.000	194.049	2.3%
	12-Feb-25	Long BRL/MXN	Click here	3.560	3.400	3.900	3.525	-0.6%
	17-Jan-25	Long USD/CNH 4m 7.5×7.6 call spread	Click here	25 bps		120 bps	3 bps	-22 bps
	10-Jan-25	Short INR/KRW	Click here	17.000	17.200	16.000	16.788	1.2%
	25-Oct-24	Short AUD/NZD	Click here	1.109	1.130	1.060	1.094	1.3%
	05-Mar-25	2s10s Bund Steepener	Click here	0.005	0.003	0.010	0.006	13 bps
Rates	03-Mar-25	Short Euribor Z5	Click here	97.968	98.100	97.600	97.920	5 bps
	07-Jan-25	Pay 10y EUR Swap	Click here	2.430%	2.050%	3.000%	2.708%	28 bps
	13-Nov-24	2s10s Gilt Steepener	Click here	0.000%	-0.300%	0.600%	0.443%	44 bps
	13-Nov-24	Long SONIA Z5	Click here	95.900	95.700	96.400	96.075	17 bps
Equity	10-Mar-25	Long CO K5 (50% position)	Click here	69.80	68.00	75.00	71.19	1.0%
Source: Macro Hive

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