The leading European options traders bet that the European Central Bank will loosen monetary policy at twice the pace currently expected. The forex markets are betting on 1.5 basis point rate cuts by June, according to swaps linked to the dates of monetary policy meetings. That’s much more than at the start of the year, when three cuts of 0.25 points each were the consensus forecast amid concerns about the growth outlook.
However, a series of strong US economic data allayed those worries, prompting traders to cut bets on how much the Federal Reserve will cut interest rates. which will also affect Europe. One trader took advantage of that retreat by buying options tied to three-month Euribor futures, which will pay off if the ECB cuts the deposit rate by 75 basis points to 3.25%, according to two London-based traders who asked to remain anonymous because they are not authorized to speak on the subject publicly.
The trade aims for a maximum profit of 8.3 million EUR, or about ten times the initial cost. The price is reduced by writing put options, which can potentially lead to unlimited losses if the central bank unexpectedly decides to tighten monetary policy. However, the trade can be terminated at any time, which minimizes the chances of a big loss in the original position.
Revised fourth-quarter growth data for the euro zone this week is expected to confirm that the economy has stagnated, eclipsing a technical recession. Germany’s economy is likely to have failed to return to growth at the start of the year, according to the survey, as well as Bundesbank forecasts. In the longer term, economists expect a more than 50% chance of a recession in the eurozone, compared with around 50% for the US and UK.
“The time to change the course of monetary policy is approaching”, said Governing Council member Fabio Panetta said at the annual Assiom Forex event in Genoa at the weekend, adding that there were no signs of a major economic acceleration in the single currency area. Mario Centeno last week also said that “the economy must not lose its momentum – this is my main concern for Europe”.
