The European Central Bank will hold its next meeting on April 17, with market expectations indicating an 88% likelihood of a rate cut.
Nagel, known for his hawkish stance, suggests this could increase the probability of a cut to 100%.
June Outlook Remains Uncertain
In June, the outlook appears more uncertain, with an equal chance of a rate adjustment in either direction.
So far, the European Central Bank (ECB) has telegraphed a fairly straightforward path for its upcoming April meeting. With market pricing pointing to an 88% chance of a rate reduction, the current mood suggests a high degree of alignment between policymakers and financial participants. Nagel’s remarks, leaning further towards easing, may be interpreted as softening resistance within the Governing Council. This raises the odds closer to certainty for April, at least from the perspective of rate expectations.
But further out, clarity diminishes. As we look to June, the probability distribution has flattened. Pricing now implies that a rate move — whether downward or upward — is anyone’s guess. This is notable because until recently, dovish sentiment had dominated, with a follow-up cut in the early summer considered a given. The shift signals growing sensitivity to incoming data, particularly around inflation and wage dynamics in the euro area, which might not be decelerating as previously thought.
What this means, practically, is that conviction trades beyond April should be approached with care. The trajectory for rates is no longer unidirectional. We interpret this divergence as a short-term adjustment period where previously reliable signals are losing strength. In past cycles, when forward guidance became fuzzier, implied volatility tended to pick up — especially in the front-end of the rates curve. That pattern appears to be returning.
Strategies For Navigating Market Volatility
With that in mind, there is little incentive to lean too heavily into expectations beyond next month. Given the ECB’s own communication is becoming more dependent on data, repricing may continue to occur abruptly. For us, that warrants a more reactive approach through May, reserving space to adjust positioning based on macro prints and real-time commentary from central bank officials.
To capitalise on the current setup, tight expiry plays around the April meeting may still offer value. However, longer-dated directional exposures now carry more two-way risk. In these circumstances we tend to reweight towards relative value or skew-based structures, particularly where mispricing of volatility remains. The euro rates curve itself has flattened slightly, which means convexity trades could re-emerge — though selective timing is key.
Option premiums are still on the rich side by historical standards, inflated by lingering uncertainty and residual demand for protection. Yet if the market continues to price conflicting outcomes into June, that discomfort might persist. In our view, that makes it worthwhile to manage exposures with precision, keeping directional bias minimal until the ECB offers a clearer forward path — or until macro data forces their hand once again.
