Deutsche no longer expects the European Central Bank (ECB) to cut rates, instead predicting the next move will be a rate hike. Previously, they anticipated a rate cut in September with a terminal rate of 1.50%.
The firm acknowledged emerging risks to their 1.50% baseline, recognising possibilities of the ECB’s easing cycle concluding at 1.75% or even 2.00%. Deutsche now foresees a rate increase by the ECB, but not until the end of 2026.
Ecb Easing Cycle
We believe the European Central Bank’s easing cycle has now ended. The market had been pricing in a further rate cut in September, but this view is becoming difficult to justify. Our focus now shifts to a long period of stable rates before any future policy moves.
This change is supported by recent data showing inflation is proving stubborn. The flash estimate for July 2025 HICP inflation came in at 2.5%, ticking up unexpectedly and remaining well above the ECB’s target. Furthermore, negotiated wage growth held firm at a high 4.7% in the second quarter, fueling concerns about underlying price pressures.
For derivative traders, this means unwinding bets on falling short-term interest rates. We expect to see selling pressure on Euribor futures for late 2025 and early 2026 contracts as the market reprices the path of policy. The new baseline suggests yields will find a floor here, making strategies that profit from stable rates more attractive.
Market Volatility and Strategy
This sudden shift in central bank guidance will likely increase market volatility in the coming weeks. We see value in options strategies that benefit from larger price swings in both bonds and currencies. In foreign exchange markets, this hawkish pivot is supportive for the Euro, suggesting traders should reconsider short EUR positions.
Historically, when central banks abruptly pause an easing cycle, government bond yields tend to rise from their lows. We saw a similar repricing in 2011 when the ECB reversed course, leading to a sell-off in German Bunds. Consequently, positioning for higher yields through bond futures may be a prudent response.
