(Bloomberg) -- A trader is eyeing a huge payday by betting the European Central Bank will deliver outsized interest-rate cuts this year as the economic outlook darkens.
The wager, placed using options on futures tied to the three-month Euribor funding rate, will pay out more than €14 million ($15.7 million) — 20 times the initial premium — if policymakers reduce the deposit rate to 2.5% from the current 3.5% during the next two policy meetings.
Bets on further easing from the ECB surged this week following a run of weak economic data, including a contraction in the euro-area private sector activity and an unexpected drop in Germany’s business confidence. Still, swaps price roughly 50 basis points of easing through the end of the year, half the target of the bold trade.
The chance of a quarter-point reduction at the ECB’s October meeting is now at 60%, up from 20% last week. Economists at HSBC Bank Plc changed their forecast to 25-basis-point reductions at every meeting starting next month, while Schroders Plc says an October rate-cut is justified.
ECB Governing Council member Madis Muller, whose monetary views are skewed toward the hawkish end, said this week that an October cut could not be ruled out totally. Last week, his colleague Klaas Knot, a noted hawk, said he was comfortable with the market’s view for one or two additional quarter-point moves this year.
The Bundesbank has warned that the German economy may already be in recession, with another contraction in the third quarter possible after a 0.1% decline in the second. The OECD was the latest institution to recommend reforms to boost economic growth on Wednesday, citing the need to improve competition and cut bureaucracy.
The ECB’s next steps also hinge on decisions made by the Federal Reserve, which lowered interest rates by a half point this month to boost the chances of an economic soft landing. It’s expected to follow with 75 basis points of further cuts this year.
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