Markets continue to price two to three European Central Bank rate rises in 2026. For April, pricing still implies a 60% chance of a rise. The European Central Bank is weighing how to stay guided by incoming data while also steering rate expectations across the yield curve. Markets have reacted to US efforts to seek a deal, but pricing for two to three rises remains in place.

Oil Prices And Inflation Outlook

Oil prices are treated as a key input for the near-term inflation outlook, and they have changed little since the start of the week. President Christine Lagarde said on Wednesday morning that the ECB would not act until it had enough information, and could look through a short-lived price shock. Market pricing implies the possibility of a firmer ECB response to stop a price spiral. Longer-dated forward inflation swaps have been relatively stable, while Euribor futures show a hump that points to some later reversal. The ECB faces trade-offs in its messaging, as a more dovish tone could push up long-end yields if inflation expectations drift higher. A more hawkish tone could shift attention to weaker growth. We see the market is convinced the European Central Bank will deliver at least two rate hikes this year, with a strong 60% probability priced in for a move as early as April. With the latest flash estimate for Eurozone inflation ticking up to 2.8%, driven by energy, the pressure on the ECB is building. This aggressive pricing suggests traders should be positioned for hawkish action.

Trading The Euribor Curve

The main variable remains the price of oil, which is creating a serious dilemma for the central bank. Brent crude has been stubbornly holding above $92 a barrel, and any further supply disruption could force the ECB to act decisively to prevent a price spiral. This contrasts with President Lagarde’s recent comments about looking through short-term shocks, creating the exact uncertainty traders can exploit. This environment suggests playing the “hump” in the Euribor futures strip, which implies the market expects hikes soon but a partial reversal later on. One could consider shorting near-term futures contracts to bet on a hike while buying longer-dated contracts to position for an eventual easing. The key is to trade the expected shift in the curve, not just the outright direction. Given the ECB’s balancing act between managing inflation expectations and avoiding a recession, volatility is a crucial play. The difference between what the market is pricing and what the ECB is signaling creates an opportunity to buy volatility through options. A straddle on German Bund futures heading into the April meeting could prove profitable if the bank delivers a surprise in either direction. Long-term inflation swaps remain relatively stable, suggesting confidence that the ECB has the tools to manage inflation, a credibility earned during the aggressive hiking cycle we saw end back in 2025. However, this time is different, as recent PMI data shows a fragile manufacturing sector that could be damaged by overly aggressive policy. The ECB might ultimately be forced to hike simply to meet market expectations and buy itself more time. Create your live VT Markets account and start trading now.

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