US: A narrowing balance of risks

At its most recent meeting, the Federal Reserve left policy unchanged, reinforcing a cautious tone while acknowledging continued progress on inflation. The message was one of patience rather than urgency, reflecting the uncertainty around how quickly inflation will return to the 2% benchmark.

Even so, the U.S. rates outlook is becoming more finely balanced. Inflation remains somewhat sticky, particularly in services, but the labour market has begun to show clearer signs of softening. Hiring momentum has slowed and forward-looking indicators suggest conditions may weaken further over the coming quarters.

Simultaneously, the policy backdrop is evolving. The incoming Fed leadership is widely seen as having a somewhat stronger inclination toward lower rates, and this may currently be insufficiently priced in the curve. Whether justified by the data or not, changes in leadership can influence reaction functions, communication, and ultimately the pace of easing once it begins.

Taken together, this suggests that while volatility in expectations is likely to persist, the balance of risks may lean toward rates ultimately moving lower than currently priced, even if inflation proves slower to return to target.

For USD fund managers, the usual ‘pick-up’ in their hedging programs may keep fading, but lower rate expectations may continue to fuel the move in USD spot levels, helping those who remain less than 100% hedged.

The dollar’s role in the global economy has not been questioned so severely for many years. Regardless of the direction we ultimately see prices move, now is the time to pay close attention to political and economic drivers of markets. 

UK: A fine balance at BoE

The UK faces a similarly uncertain outlook to the U.S. Labour market data have continued to come in weaker than expected, and political uncertainty is increasingly weighing on business confidence and consumer sentiment, contributing to a fragile growth backdrop. 

At its most recent meeting, the Bank of England held rates but the decision was finely balanced, passing by a narrow 5–4 vote. Four members of the Monetary Policy Committee judged that conditions were already appropriate for a cut, underlining how close policy may be to turning.

Nonetheless, credible voices urging caution remain. Chief Economist Huw Pill has argued that the Committee must be careful not to ease too quickly, reflecting concern that inflation persistence risks have not fully disappeared.

Recent inflation data – CPI fell to 3% from 3.4% and core fell to 3.1% from 3.2% – has added some weight to the doves but these figures remain well over the 2% target. Current pricing of roughly two cuts for the remainder of the year appears reasonable, but the curve remains highly sensitive to incoming economic data and political developments. Moves in UK rates are likely to remain reactive, with sentiment shifting quickly as new information emerges.

Eurozone: Stability first 

The Eurozone currently stands apart from both the U.S. and the UK in that the most likely near-term outcome for policy rates is stability rather than easing. At its most recent meeting, the European Central Bank held rates at 2%, and market pricing reflects a similar view, with less than 10 basis points of cuts priced in for 2026.

While growth remains modest, the inflation outlook is subject to a different set of risks than in other regions. Fiscal policy is becoming more expansionary in some parts of the bloc, most notably through increased spending in Germany, which has the potential to feed through into demand and, over time, prices.

External risks also remain. The possibility of renewed trade tensions and tariffs, particularly given the capricious nature of U.S. policy, is another channel through which inflationary pressures could re-emerge.

Thus, the Eurozone is unique in the current environment. While other major economies are debating how quickly to cut rates, the ECB may instead remain on hold for longer, and in some scenarios, the risk to rates is higher rather than lower. Euro funds with unhedged dollar assets have seen entry levels move significantly away from them in recent months. But with the cost of carry falling - and the potential for a continued “dethroning” of the dollar - some funds investigating ways to remove this risk.

Bottom line 

The direction of travel for rates across developed markets may still be lower overall, but the path is becoming less predictable and less synchronised. In this environment, effective hedging is less about identifying a single turning point and more about managing uncertainty across a range of plausible outcomes. As the cycle unfolds at different speeds - and in some cases pauses altogether - flexibility and diversification of timing are likely to remain central to effective risk management.