(Bloomberg) -- One trader is wagering huge sums that the European Central Bank will quicken the pace of interest-rate cuts to prop up the region’s economy.
The trade, using options on futures tied to the three-month Euribor funding rate, will pay out €37.5 million ($40.6 million) on an initial €6 million premium if policymakers reduce the deposit rate to 1.75% or lower by the middle of next year, according to rates traders familiar with the transaction.
With an initial €6 million premium, that would equate to a sixfold return if the ECB cuts to that level from its current rate of 3.25%, said the traders, who asked not to be identified because they are not authorized to speak publicly.
Swaps pricing anticipates the key rate falling to 2% by June. Money markets last week increased bets that favor a half-point reduction in December, after private-sector activity in the euro area contracted for a second month with Germany and France showing few signs of a recovery.
This week’s inflation numbers may boost rate-cut expectations if price growth slows. While German and French numbers are forecast to pick up in October, the euro-area core figure — which strips out the more volatile components — is expected to slow for a third consecutive month to 2.6%, according to a Bloomberg survey of analysts.
Plunging oil prices amid the prospect of easing tensions in the Middle East are a catalyst for a further slowdown in prices given Germany’s reliance on imported energy. The German 10-year breakeven rate, derived from the difference between conventional and inflation-adjusted yields, fell for a fourth day to 1.77%, the lowest since early October.
“The ECB is likely eyeing falling inflation expectations in the lead-up to its December 12 policy meeting,” Macquarie Group Ltd. strategists including Thierry Wizman wrote in a client note. “That, plus signs of financial distress, could induce a 50 basis point cut.”
©2024 Bloomberg L.P.
