Bets on Surprise ECB Cut in 2026 Aim for 12-Fold Return

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(Bloomberg) — Traders are using options to bet on European Central Bank policymakers surprising markets by delivering a quarter-point interest-rate cut at some point this year. 

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A number of large wagers have been placed this week through options strategies tied to the three-month Euribor funding rate, which could pay out a total €32 million ($38.3 million) — or 12 times the amount paid — if the ECB cuts.

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It’s a contrarian move given the ECB has long been expected to hold borrowing costs steady this year, having brought inflation just below its target. It’s expected to stay pat at its first meeting of the year next week, though policymakers now have to factor in a surge in the euro that is creating talk around the potential for further easing.

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“2026 pricing looks really attractive from an asymmetric point of view,” Kim Crawford, a global rates portfolio manager at JPMorgan Asset Management, told Bloomberg TV. “The market is pricing nothing and if the ECB were to do something it would be to cut and not hike.”

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While it’s common to have the odd contrarian punt in the market, a sudden flurry like this could hint at a shift in sentiment. Bets for more easing increased after a surge in the euro against the dollar prompted Austria’s central bank governor Martin Kocher to warn that rate cuts would need to be considered if the rally was big enough to lower inflation projections. 

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A strong currency reduces the cost of imports, which feeds through to slower price growth. The euro hit its highest since 2021 earlier this week, as concerns around US policymaking hurt the greenback.

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Money markets are still only assigning around a 25% chance of a rate cut this year. They also expect a 2% ECB deposit rate to hold into early next year, extending a status quo in place since the last cut in June. 

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“I don’t see the ECB pivoting to a more dovish stance on the back of the euro-dollar move. I think the ECB is firmly on hold,” said Lucile Flight, managing director in rates trading at Barclays Plc.

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No Hike

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The options trades are unusual in that their cost has been reduced by also laying bets on policymakers not hiking rates. A 25-basis-point increase would incur losses totalling around €15 million, while a half-point of tightening would be a €35 million blow, including the premiums paid. However, most traders do not hold such positions until they expire. 

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The large bets saw volumes in call and put options expiring in December jump to almost 600,000 contracts on Wednesday, more than double the next busiest day. 

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Some traders are also using options to bet there’ll be no change by the ECB. One is targeting rates staying on hold until the middle of this year, a wager that would return 2.5 times the €1.9 million outlay.

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Barclays’ Flight said that stance made sense given there isn’t downward pressure in inflation forward markets, and the impact from energy prices would be more pronounced than from the move in the euro.

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“It firmly takes rate hikes off the table. But I think moving beyond this would be unwarranted,” she said.

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