(Bloomberg) -- Traders are placing big options bets on the European Central Bank delivering at least one half-point cut to interest rates by the middle of the year.
The wagers have focused heavily on options tied to the three-month Euribor funding rate that’s expiring in June and have been rapidly amassed since the start of the year, according to data compiled by Bloomberg.
One bet in particular will pay out more than €11 million ($11.46 million), 25 times the initial outlay, if policymakers lower the deposit rate by 125 basis points over the course of the coming four policy meetings, the data show. Such an outcome would imply a 50 basis-point reduction at one of the meetings and was anticipated as recently as last month.
ECB policymakers at the World Economic Forum in Davos, Switzerland, this week said they intend to reduce interest rates further as inflation remains primed to hit 2% this year, with quarter-point cuts possible at each meeting. A reduction of such magnitude is priced for the next decision on Jan. 30, according to swaps tied to policy-meeting dates.
Wagers on ECB rate cuts have been steady in the days leading up to Donald Trump’s inauguration as US president earlier this week, as traders ascertain the outlook for US interest rates.
Swaps are baking in three quarter-point reductions from the ECB by June and a total of four by year-end. The Federal Reserve’s next steps are less clear, with markets evenly split on one or two cuts this year.
For strategists at ING Groep NV, much hinges on whether traders begin to bet on greater Fed easing — an outcome they expect to happen. In that case, they say a full point of ECB cuts might not be sufficient.
“Markets may very well start toying with the idea of a terminal rate closer to 1.5% again,” Michiel Tukker, a senior European rates strategist at ING, wrote in a note to clients.
Volumes in Euribor call options expiring in June reached almost 600,000 contracts on Wednesday, according to the data. Similarly, outstanding positions tied to the expiry have surged around 75% to reach nearly 2 million contracts since the start of the year.
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