(Bloomberg) -- Traders should wager on a slower pace of interest-rate cuts by the European Central Bank next year, according to Citigroup Inc., which says the market has gone overboard in betting on swift reductions.
Money markets currently expect the ECB to cut rates at every meeting though June, followed by just one more move in the second half of 2025. For Citigroup’s Jamie Searle, the chance to bet against that positioning is too good to miss, especially if US President-elect Donald Trump imposes trade tariffs on the region.
He argues that tariffs would inflict pain on an economy already struggling to gain traction, likely requiring a stronger ECB policy response in the second half of the year than the market anticipates.
“The ECB mid-year pause currently priced roughly coincides with when the greatest impact from Trump tariffs may be felt,” he said in a client note.
Searle recommends selling futures tied to the three-month Euribor funding rate expiring in June and buying contracts expiring in December 2025, a set up that would profit if traders push easing expectations to later in the year.
Currently money markets are front-loading their bets for cuts, seeing the possibility of a half-point cut this week. They expect the deposit rate to end next year at 1.75%. By contrast the US bank’s economists forecast policymakers will eventually have to lower it to 1.5%.
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