Traders are increasing their bets on further European Central Bank (ECB) rate cuts after the institution implemented its first consecutive rate reduction in over a decade. Following a 25 basis point (bps) cut to the deposit rate, bringing it to 3.25%, the market is interpreting the ECB’s actions as the start of a faster easing cycle.
Why the Rate Cuts?
The ECB’s decision was prompted by a worsening economic outlook and signs that inflation is coming under control. ECB policymakers, while cutting rates, emphasized that they are not committing to a particular rate path and will keep monetary policy tight to ensure inflation is fully tamed. However, traders took ECB President Christine Lagarde’s relatively light pushback on market expectations as a green light for further cuts.
Market Reactions
Following the ECB’s move, traders quickly adjusted their rate-cut bets. The market now expects another cut in December, with some speculating whether the reduction will be 25 bps or as large as 50 bps. In total, traders are pricing in around 160 bps of rate cuts by the end of 2025, a faster pace than expected from the U.S. Federal Reserve or the Bank of England.
Eurozone Bonds and Currency
Eurozone government bonds benefited from the move, with bonds slightly outperforming U.S. Treasuries in October. However, the euro fell to its lowest levels since August, closing at $1.0811, as market participants remain concerned about economic risks in the region.
External Risks: U.S. Election and Tariffs
Adding to the uncertainty, the U.S. presidential election looms large over the euro’s outlook. Should Donald Trump win, his potential tariff policies on imports could hurt the eurozone economy, increasing the likelihood of further ECB easing.
With the U.S. economy showing stronger-than-expected retail sales and job data, traders are left navigating a complex global landscape as they assess the ECB’s next move.
As the ECB embarks on back-to-back rate cuts for the first time since 2011, the eurozone faces a mix of internal economic challenges and external risks, with traders betting on continued easing. While bond markets have found some support, the euro is expected to stay under pressure in the near term.