UBS has changed its forecast for a rate cut by the European Central Bank (ECB), moving the expected date from July to September. This change matches what the market expects, with traders estimating a 97% chance that there will be no policy change at the next ECB meeting. Currently, traders expect only about 20 basis points of rate cuts by the end of the year. This shows that the financial markets do not expect major policy changes in the near future.

UBS Matches Market Expectations

UBS’s new prediction aligns with broader market views that the ECB may not act quickly. With inflation cooling and wage growth still relatively high, policymakers seem willing to wait. Christine Lagarde has stated that they need “sufficient evidence” of inflation returning to target before considering a rate change, which supports this new forecast. As forecasts indicate a possible cut later this year, short-term rate volatility might decrease slightly, providing some relief. However, the pricing of options shows low confidence in major policy shifts, as the rates trend remains steady. Yields on short-term Bunds have stayed within a narrow range, reflecting this uncertainty. It seems any big changes in short-term contracts will be limited unless the underlying data changes. The ECB has consistently emphasized that it depends on data; thus, future guidance is likely to remain vague. Philip Lane’s recent remarks suggest that mixed indicators, especially in services, do not support quick decisions.

Focus on Patience and Accuracy in Trading

According to our models, the biggest activity is expected around the ECB’s September meeting. When looking at implied volatility, there is a rise in open interest for that period, especially in front-end Eurolibor and Euribor structures. This indicates growing interest in trades linked to this timeframe. Given these developments, we view any rise in hawkish sentiment as an opportunity to step back. Data from STIR futures shows a tendency towards neutral exposure. The reduced expectations for terminal rates suggest the market anticipates less increase in this cycle and is instead considering when rates might decrease. For now, we need to be patient and precise. Ongoing inflation, especially in services, and persistent wage pressures could still disrupt expectations. However, unless there’s an external shock or an unexpected rise in core inflation, we believe the current trading environment favors steady roll-down strategies and tactical butterfly trades. High-confidence trades on immediate rate changes do not seem favorable until we see the next wage data and labor market indicators. In reviewing the options chain, there is noticeable demand for downside protection in longer-dated expiries. Traders seem to be preparing for delays rather than quicker rate actions. Practically speaking, we are focusing on layered exposure, building conditional cut positions for Q4 while reducing sensitivity to short-term rates. UBS analysts are not the only ones adjusting expectations. Other teams have also quietly changed their forecasts, leaning towards later actions as Eurozone activity softens but does not collapse. What is crucial now is understanding the trends in wage growth, as they could delay disinflation and keep policies restrictive longer than some anticipate. The message from policymakers is clear: there’s no rush. This gives traders a chance to refine strategies rather than completely rethink direction. We are focusing on modest calendar spreads and slope-flattening strategies that consider slow normalisation. In this environment, careful adjustments are more important than bold predictions. Create your live VT Markets account and start trading now.

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