JP Morgan has changed its prediction for the European Central Bank’s next rate cut, moving it from September to October. The bank still expects the terminal rate to be 1.75%. While many analysts thought the cut would happen in September, there are differing views on the terminal rate. Institutions like Deutsche Bank, Citi, Barclays, and Nomura believe the terminal rate will be lower at 1.50%.

Convergence in Forecasts

JP Morgan’s prediction aligns with Commerzbank, Goldman Sachs, Societe Generale, UBS, and Danske, who also estimate the terminal rate to be 1.75%. We see JP Morgan’s updated forecast as a sign that reducing rates might take longer than expected. The move from a September cut to an October one suggests that borrowing costs won’t drop as quickly as the market anticipated. This change is crucial for our strategy. Recent data backs up this view, showing that Eurozone inflation unexpectedly rose to 2.6% in May, up from 2.4% in April. Additionally, wage growth hit a record 4.7% in the first quarter, complicating the central bank’s efforts to lower prices sustainably. These figures support the idea of a policy pause after a June cut. As a result, we should think about adjusting our short-term interest rate positions to be more cautious. This might mean pulling back on trades that depended on a September cut or unwinding bets on quickly falling Euribor futures. Our attention now turns to the fourth quarter for the next major policy action.

Uncertain Policy Outlook

Beyond the immediate timing, the differing terminal rate predictions between institutions like Deutsche Bank and Goldman Sachs highlight significant long-term uncertainty. Whether rates settle at 1.75% or drop to 1.50% creates a wide range of outcomes for the yield curve over the next two years. We need to prepare for this lack of consensus on where policy may end up. Historically, the European Central Bank has been very cautious. It tends to pause and assess new data rather than quickly implement cuts. We saw similar pauses during the easing that followed the sovereign debt crisis, where market expectations for cuts were often delayed. This historical pattern makes a delay a very likely scenario. In this environment, options strategies on interest rate futures could be especially appealing, allowing us to profit from increased volatility without betting on one direction. We might also consider yield curve steepener trades, which would benefit if long-term rates remain relatively high while the market debates the future of this cutting cycle. Create your live VT Markets account and start trading now.

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