The chance of the European Central Bank (ECB) making another rate cut next year has dropped to just below 50%. This change comes after President Lagarde’s positive speech. Before the press conference, market expectations for mid-2026 were around 60%. However, views changed after the conference, leading to lower expectations. Now, many believe the most likely time for an additional cut is during the July 2026 meeting, with an expected easing of 12.2 basis points. For the rest of this year, the chance of a rate cut has fallen from 40% to 24% after the ECB’s decision. Meanwhile, the euro rose about 45 pips from its level before the ECB announcement. After an initial drop, the euro gained strength as Lagarde changed her outlook on growth risks from negative to neutral.

Big Changes in Interest Rate Expectations

We are seeing major changes in interest rate expectations following the ECB’s recent statements. The likelihood of a rate cut before the end of this year has dropped from 40% to just 24%. This suggests that the ECB may be willing to keep rates steady for longer than we expected. This change is backed by recent data showing a stronger Eurozone economy. August’s inflation rate was slightly higher at 2.4%, and early September flash PMIs suggested the services sector is growing at its fastest pace in over a year. A central bank concerned about growth wouldn’t be seeing these positive figures. For currency traders, this stronger data supports the euro, which rose by 45 pips today. With the Eurozone unemployment rate recently hitting a low of 6.3%, the economic environment favors a stronger currency. Options traders might think about selling out-of-the-money puts on the euro, as the risk of a sharp decline seems to have decreased.

Interest Rate Market Vulnerability

In the interest rate markets, bets on quick and steep cuts now look vulnerable. We remember the strict tightening cycle from 2022 to 2023, and it seems the ECB is not in a hurry to reverse those actions after the earlier cuts this year. Short-term interest rate futures may face selling pressure as the timeline for the next cut extends towards mid-2026. Create your live VT Markets account and start trading now.

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