The European Central Bank is poised to cut its deposit rate by 25 basis points to 2% at its upcoming meeting, supported by Eurozone inflation falling to 1.9% in May, below the 2% target, and declining core inflation due to weaker services inflation. Sluggish GDP growth and trade tensions, particularly from rising U.S. tariffs, strengthen the case for further easing, with markets anticipating another 25bps cut by September, potentially bringing the rate to 1.75%, seen as the neutral zone. The ECB may downgrade its growth and inflation forecasts, and significant downward revisions could signal more cuts if inflation projections fall below 1.7% for 2026. Despite these cuts, EURUSD remains supported by a weakening dollar due to U.S. fiscal concerns and a potential Fed rate cut later in 2025, narrowing the rate differential, while optimistic EU-U.S. trade talks are tempered by concerns over new tariffs.

The Bank of Japan is signaling a shift from ultra-loose monetary policy, with Governor Ueda confirming ongoing bond purchase reductions to improve market functionality, while setting aside full provisions for expected bond transaction losses as interest rates rise. Weak demand at the latest 30-year JGB auction, with the lowest bid-to-cover ratio since 2023, suggests investor caution, potentially supporting yen strength as higher yields attract capital. Despite solid nominal wage growth of 2.3–2.6% in April, real wages fell 1.8% year-on-year, continuing a two-year decline that erodes household purchasing power and may constrain aggressive BOJ rate hikes. Analysts anticipate no rate change at the June 16-17 meeting but see a possible hike in July due to persistent inflation, with one major bank forecasting a yen appreciation of over 5% against the dollar by year-end.

The Reserve Bank of Australia’s May meeting minutes revealed a dovish tilt, with some members considering a 50bps rate cut as a precaution against global trade risks and U.S. tariff hikes, though no immediate shift to expansionary policy was deemed necessary. Australia’s Q1 GDP grew a weaker-than-expected 0.2%, below the 0.4% forecast, signaling vulnerability to global trade tensions and reinforcing expectations for an RBA rate cut in July. April’s trade surplus narrowed to A$5.41 billion, below the A$6 billion forecast, driven by a sharp 2.4% drop in exports and a 1.1% rise in imports, while household spending grew a modest 0.1% month-on-month, reflecting cautious consumer behavior amid global uncertainties. The OECD’s warning of a stalling global economy due to U.S. tariffs, particularly impacting China, Australia’s key trading partner, further supports the RBA’s cautious approach.