Deutsche no longer expects the European Central Bank (ECB) to lower interest rates. Instead, they now predict the next move will be an increase. Just recently, they thought the ECB would cut rates in September to a low of 1.50%. The firm has recognized that there are new risks regarding this 1.50% outlook. They now see the ECB’s easing cycle potentially ending at rates of 1.75% or even 2.00%. Deutsche anticipates the ECB will raise rates, but only at the end of 2026.

Ecb Easing Cycle

We believe the easing cycle of the European Central Bank has come to an end. The market had expected another rate cut in September, but this perspective is becoming harder to support. Our attention now turns to a long period of stable rates before any future changes. This adjustment is backed by recent data showing inflation is still high. The flash estimate for July 2025 HICP inflation was 2.5%, which unexpectedly jumped and is well above the ECB’s target. Additionally, wage growth remained strong at 4.7% in the second quarter, raising concerns about ongoing price pressures. For those trading derivatives, this means shifting away from bets on decreasing short-term interest rates. We expect to see selling pressure on Euribor futures for contracts due late 2025 and early 2026 as the market adjusts to this new policy direction. The updated baseline suggests that yields will stabilize here, making strategies that benefit from steady rates more appealing.

Market Volatility and Strategy

This sudden change in guidance from the central bank is likely to increase market volatility in the upcoming weeks. We see opportunities in options strategies that capitalize on larger price movements in both bonds and currencies. In the foreign exchange market, this shift is positive for the Euro, encouraging traders to rethink any short positions in EUR. Historically, when central banks quickly halt an easing cycle, government bond yields tend to rise. A similar change occurred in 2011 when the ECB shifted its stance, which led to a sell-off in German Bunds. Therefore, positioning for higher yields through bond futures may be a wise approach. Create your live VT Markets account and start trading now.

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