Deutsche Bank believes that the European Central Bank (ECB) has reached its highest interest rate after the September meeting. Markets are now seeing less chance of further cuts. It’s expected that the ECB will keep a stable 2% rate until late 2026, when a rate increase might happen.

Market Consensus

Following the ECB’s September meeting, Deutsche Bank noted that many in the market agree that policy rates have peaked. The ECB’s message indicated satisfaction with a long-term 2% rate, which helps manage economic uncertainties and fluctuations, while allowing some flexibility with its 2% inflation target. Market reactions showed a lower chance of further cuts, matching Deutsche Bank’s expectations. The bank had already predicted a 2% terminal rate after the announcement of the EU-US trade deal. While there’s still a slight chance of cuts—especially if inflation expectations lower in early 2026—Deutsche Bank thinks the likelihood of further cuts has grown. In summary, Deutsche Bank suggests the ECB’s next move will be a rate increase by the end of 2026, and the September meeting raised the chances of policy changes. We view the ECB as having hit its peak rate after the September meeting, signaling a time of policy stability. This implies that fluctuations in short-term interest rates should lessen in the coming weeks. Traders might consider strategies that take advantage of this, such as selling straddles on short-term Euribor futures to earn premium from the expected stability. This outlook is backed by recent economic data showing persistent inflation. For example, the Eurozone’s flash CPI estimate for August 2025 was 2.4%, remaining above the ECB’s 2% target. This makes it clear that achieving rate cuts will not be easy, supporting the idea of stable rates.

Policy Implications for Currency Derivatives

With short-term rates expected to stay at 2%, the yield curve may start to steepen as the market looks ahead. We recall the significant steepening in 2022 when markets began to anticipate future rate hikes after a long pause. A similar but slower trend could develop, making trades that bet on long-term rates increasing faster than short-term rates, like paying fixed on a 5-year swap while receiving on a 2-year swap, appealing. This policy approach also affects currency derivatives, especially against the US dollar. The recent US jobs report from August 2025 indicates a slowdown, making it more likely that the Federal Reserve will cut rates compared to the ECB. This difference in policies should support the Euro, making long EUR/USD forward contracts or call options sensible positions to consider. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now