The likelihood of the European Central Bank (ECB) implementing another rate cut next year has decreased to just under 50%, following an upbeat address by President Lagarde. Before the press conference, market predictions for mid-2026 were at around 60%. However, sentiment shifted post-conference, pushing expectations lower. Currently, the July 2026 meeting stands as the most probable timeframe for an additional cut, with 12.2 basis points of easing anticipated.
For the remainder of this year, expectations for a rate cut have diminished from 40% to 24% following the ECB’s decision. Meanwhile, the euro observed a rise of about 45 pips from levels prior to the ECB announcement. Initially declining, the euro recovered and increased as Lagarde adjusted growth risk assessments from negative to neutral.
Significant Repricing In Interest Rate Expectations
We are seeing a significant repricing in interest rate expectations following the ECB’s latest statements. The probability of another rate cut before the end of this year has been slashed from 40% down to just 24%. This shift suggests the ECB may be content to hold rates steady for longer than we previously thought.
This change in sentiment is supported by recent data showing a more resilient Eurozone economy. August’s headline inflation came in slightly hot at 2.4%, and early September flash PMIs indicated the services sector is expanding at its fastest pace in over a year. A central bank worried about growth would not be seeing these kinds of numbers.
For currency traders, this strengthens the case for the euro, which we saw rally 45 pips today. With the Eurozone unemployment rate recently hitting a multi-decade low of 6.3%, the economic backdrop supports a stronger currency. Options traders might consider selling out-of-the-money puts on the euro, as the perceived risk of a sharp decline has now lessened.
Interest Rate Market Vulnerability
Looking at the interest rate markets, positions that bet on steep and rapid cuts are now looking vulnerable. We remember the aggressive tightening cycle of 2022-2023, and it appears the ECB is in no rush to undo that work completely after the initial cuts earlier this year. Short-term interest rate futures should see selling pressure as the timeline for the next cut gets pushed out towards mid-2026.
