In its latest quarterly review, the Bank for International Settlements (BIS) noted that the financial markets moved with the waxing and waning of expectations of early policy rate cuts as central bank communication pushed back against such expectations and data releases pointed at more stubborn inflation pressures.
The report noted that the U.S. dollar appreciated markedly from January onwards in response to signs of later-than-expected rate cuts. "This pattern reflects exchange rate movements being associated mostly with revisions to the monetary policy outlook rather than being driven by risk sentiment," it added.
According to the review's authors - Matteo Aquilina, Marco Lombardi and Sonya Zhu - uncertainty about policy rates is a key factor that influences financial markets. "Broadly speaking, policy rate uncertainty fuels the volatility of all financial assets – not only bonds – and hence has significant implications for asset prices and economic decisions," they wrote, adding that uncertainty and, more generally, the distribution of policy expectations, may also impact the transmission of monetary policy.