Insights 
VT 
Deutsche Bank predicts the European Central Bank (ECB) has reached its terminal rate following the September meeting, with markets now foreseeing fewer risks of additional cuts. The expectation is for the ECB to maintain a steady 2% rate until late 2026, when the next move could be a rate hike.
Market Consensus
After the ECB’s September meeting, Deutsche Bank observed a market consensus that policy rates have peaked. The ECB’s tone suggested comfort with a 2% long-term policy rate, seen as helping manage economic uncertainties and short-term volatility, while allowing deviations from its 2% inflation target.
Market responses showed a reduced risk of further cuts, aligning with Deutsche Bank’s expectations. The bank had already set its outlook to a 2% terminal rate following the EU-US trade deal announcement. Although the possibility of further easing exists, especially if inflation expectations dip in early 2026, Deutsche Bank believes the threshold for additional cuts has increased.
In conclusion, Deutsche Bank’s scenario suggests the ECB’s next action will be a rate hike by the end of 2026, with the September meeting increasing the possibility of further policy changes.
We see the European Central Bank as having reached its peak rate after the September meeting, signaling a period of policy stability. This suggests that short-term interest rate volatility should decline in the coming weeks. Traders might consider strategies that benefit from this, such as selling straddles on short-term Euribor futures contracts to collect premium from the expected lack of movement.
This outlook is supported by recent economic figures, which show inflation is proving sticky. For instance, we saw the Eurozone’s flash CPI estimate for August 2025 come in at 2.4%, which is still stubbornly above the ECB’s 2% target. This makes the high bar for any rate cuts seem very credible and reinforces the idea of rates holding steady.
Policy Implications for Currency Derivatives
With short-term rates likely anchored at 2%, the yield curve may begin to steepen as the market looks further ahead. We remember the sharp steepening that occurred in 2022 when markets began pricing in future hikes after a long pause. A similar, though more gradual, dynamic could unfold, making trades that bet on long-term rates rising faster than short-term rates, such as paying fixed on a 5-year swap while receiving on a 2-year swap, look attractive.
This policy stance also has implications for currency derivatives, especially against the US dollar. With the latest US jobs report from August 2025 showing a notable slowdown, the Federal Reserve appears more likely to cut rates than the ECB. This policy divergence should support the Euro, making long EUR/USD forward contracts or call options a logical position to build.
