Deutsche Bank economists expect the European Central Bank (ECB) to keep interest rates unchanged today. They expect the ECB to note higher uncertainty and higher near-term inflation risks after the Iran conflict and an oil price spike. Market pricing has shifted since the last ECB meeting. Markets now price in at least one ECB rate rise by July and two rises by year-end, and inflation swaps have moved sharply higher across the curve.

Central Banks Hold The Line

The ECB and the Bank of England both announce policy decisions today. The ECB is widely expected to follow the US Federal Reserve and the Bank of Japan by keeping rates on hold. Economists expect the ECB to restate its aim to keep prices stable and to signal willingness to act if needed. They refer to the 2022–23 inflation shock as a risk the ECB wants to avoid, with attention on keeping inflation expectations anchored. A two-day European Union leaders’ summit also starts today. Higher energy prices are expected to be discussed, with policy responses likely to focus on national energy tax cuts for now. With the ECB expected to sound more aggressive today, we should anticipate a continued rise in interest rate volatility. The conflict in Iran has pushed Brent crude futures above $115 a barrel for the first time since late 2024, directly feeding into inflation fears. This environment favors strategies that profit from wider price swings, such as purchasing options on Euribor futures.

Rates Volatility And Trading Positioning

The swaps market has already moved sharply, pricing in more than 50 basis points of hikes from the European Central Bank by December. Recent data supports this, with the latest Eurozone inflation reading for February 2026 coming in at a surprisingly high 2.8%. Traders should consider positioning for an even more hawkish shift by using interest rate swaps to bet on higher rates later this year. This situation feels very similar to what we experienced back in 2022, when energy shocks forced central banks to act decisively. The ECB will want to prove it has learned its lesson and will not fall behind the curve on inflation again. This strong commitment to price stability means the risk is skewed towards more rate hikes than are currently priced in, not fewer. Given the ECB’s hawkish tilt while other central banks like the Fed remain on hold, we could see significant currency movements. A firming euro against the dollar is a distinct possibility in the coming weeks. Derivative traders can position for this by looking at EUR/USD call options to capitalize on potential euro strength. The focus on country-level tax cuts by EU leaders, rather than a unified energy support package, may do little to curb overall inflation. This suggests underlying price pressures will remain, forcing the ECB’s hand for longer than the market expects. We should therefore be cautious about positioning for any rate cuts before mid-2027. Create your live VT Markets account and start trading now.

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