(Bloomberg) — An options trader is seeking a near eight-fold payout on a wager that the European Central Bank will slash interest rates to 1% this year.
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The bet, which has been doubled to 40,000 contracts tied to the three-month Euribor funding rate on Tuesday, is among the most aggressive in terms of size and year-end target. It will profit €25 million ($26 million) if policymakers lower the deposit rate the equivalent of a quarter-point at each of the seven remaining monetary-policy meetings this year.
That scenario compares to market expectations for just three more reductions this year, following a quarter-point cut to 2.75% last month.
The trade is an extension of large wagers which until now have mostly been focused on rate reductions by the middle of the year. It will also reach peak profit if policymakers reduce the key rate by one-and-a-half percentage points by year-end with a commitment to continue easing in 2026.
The case for more easing received a boost on Tuesday when data published by the ECB showed a key measure of euro-area pay growth slowed to 4.1% in the final quarter of last year, from 5.4% in the previous three months. This should eventually help reduce services inflation, which at around 4% has remained a cause for concern among policymakers.
Additionally, the latest gauge of business activity in the euro area hardly grew in February, reinforcing fears that the bloc remains mired in stagnation. This was a view shared by Bundesbank president Joachim Nagel about the German economy which he described as stubborn when presenting the central bank’s annual report on Tuesday.
Trading in much of the options market is anonymous, making it difficult to identify the firms or individuals involved.
(Updates headline and the second paragraph to reflect the new profit target)
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