Traders Pull Forward ECB Liftoff Bets to July on Inflation

(Bloomberg) -- Traders brought forward bets on the timing of European Central Bank interest-rate hikes after data showed inflation in the euro area unexpectedly accelerated to a record.

Money markets now see the ECB kicking off rate hikes with a 10-basis-point increase by July, compared with September previously. Consumer prices rose an annual 5.1% in January, beating expectations and raising pressure on policy makers who meet on Thursday.

While markets continue to wager on a quarter-percentage point of hikes by year-end -- which would lift the deposit rate to minus 0.25% -- the latest repricing shows traders are growing eager for a tightening cycle to start. That runs against the messaging from the ECB, which has signalled it wants to keep policy loose for longer to foster an economic recovery. 

“The inflation numbers should give her sleepless nights!” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. referring to monetary decision to be made by President Christine Lagarde and her colleagues. “A 5% inflation rate at the end of the year is quite unlikely but nevertheless a tail risk that the market has to price where the ECB will probably have to hike by more than 25bps before year-end.” 

Euro-Zone Inflation Unexpectedly Hits Record, Pressuring ECB 

The euro extended gains to as high as $1.1328, set for the longest rising streak in almost six weeks. Meanwhile, German two-year borrowing costs climbed for a seventh day -- the longest advance since September 2017 -- to minus 0.45%, the highest in almost six years.

Yields on five-year debt also rose, outpacing their longer-term peers and narrowing the gap with 30-year rates to the least since the start of the pandemic. 

“The euro has jumped above $1.13 and could remain bid into the decision,” said Roberto Cobo Garcia, head of G-10 currency strategy at BBVA. “Given that investors are starting to price in a tighter monetary policy context in the European Economic and Monetary Union, the euro downside potential should be limited.”

Traders also brought forward bets for Bank of England tightening, fully pricing a 25-basis-point hike on Thursday. 

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