Deutsche Bank Research Team has analysed the European Central Bank’s (ECB) monetary policy, predicting a pause in action until 2026, with an anticipated hike in mid-2027. Potential inflation target undershoots and external factors, like a stronger Euro, could prompt further easing.
The future of ECB’s monetary policy will depend on the balance between internal and external conditions. The prediction is that domestic resilience will result in hikes in 2027. For a rate cut, a notable deviation from the 2% inflation target is needed, with inflation undershooting the target expected later in 2026 and into 2027.
The Current Landscape
The European Central Bank looks set to keep interest rates unchanged for the rest of this year, with the next move not expected until a hike in mid-2027. For traders, this outlook points towards a period of low interest rate volatility in the Eurozone. This environment suggests that strategies benefiting from stable rates, like selling options on EURIBOR futures, could be attractive.
However, we see the risks leaning more towards a rate cut than a hike if conditions change. The Euro has been strengthening, recently pushing towards 1.15 against the dollar, which puts a lid on inflation and makes exports more expensive. With the latest flash inflation estimate for January coming in at just 1.8%, below the 2% target, the pressure on the ECB is building quietly.
We are watching the tension between a resilient domestic economy and these weaker external factors. We saw how inflation fell faster than expected in the latter half of 2025, and recent data like Germany’s manufacturing PMI dipping just below 50 shows that external demand remains a concern. A significant and lasting drop in inflation below the target would be the key trigger for any policy change.
Market Positioning
In the coming weeks, we should consider positions that reflect this view of stable policy with a dovish tilt. This could mean selling out-of-the-money call options on interest rate futures, as a rate hike seems very unlikely this year. At the same time, buying cheap, long-dated put options could serve as a hedge against a surprise rate cut if economic data worsens significantly.
