ING’s Michiel Tukker expects the European Central Bank to leave the deposit rate at 2.25% at the upcoming meeting, while a September increase is viewed as likely as oil prices rise. Markets are pricing in around 23bp, even as the ECB’s past practice has been to telegraph moves in advance, reducing the chance of an immediate change when no hike is currently priced for this meeting.
Longer-term inflation expectations are described as well anchored near target, with the 10Y inflation swap at 2.2% after moving up on higher oil. With limited fresh inflation data to support near-term tightening, current market positioning already implies almost three hikes over the next year, leaving little room for further repricing. A 25bp move at the coming meeting is treated as a tail risk, though it would more likely be seen as pulling forward September rather than marking a broader shift in policy.
ECB Rate Path and Inflation Drivers
We should expect the European Central Bank to hold the deposit rate steady at 2.25% at its upcoming meeting, but derivative traders must prepare for a September hike. With Brent crude oil prices hovering around $83 per barrel and energy volatility remaining high, inflationary pressures are building up again. Consequently, the markets have already priced in about a 23 basis point increase for September, making any immediate dovish bets highly risky.
We advise against trading against the current hawkish market pricing, as almost three rate hikes are currently priced in over the next year. Eurozone inflation swap rates for the 10-year term are sitting near 2.2%, proving that long-term expectations remain relatively well-anchored for now. However, short-term positioning suggests that any sudden drop in oil prices could quickly whip saw traders who try to front-run a policy easing.
Risk Management and Tactical Positioning
There is a slim tail risk of an unexpected 25 basis point hike at the upcoming meeting. If this occurs, we expect the market to view it merely as a front-loading of the September move rather than a more aggressive tightening cycle. Derivative traders should focus on maintaining neutral to slightly hawkish positions, utilizing options to protect against sudden oil-driven spikes.
