A trader is betting the European Central Bank will deliver a jumbo interest-rate cut next month, a scenario becoming more plausible after Donald Trump’s party won control of both chambers of the US Congress. The wager, using options on rate futures, will pay out €6.25 million ($6.6 million) — 10 times the initial outlay if policymakers reduce the deposit rate by a hefty 75 basis points or by half a percentage point with a bias for a further cut in January, according to traders familiar with the transaction.
Money markets have already baked in a quarter-point reduction for next month, and since last week’s US election have lifted the chances of a larger half-point cut to 25%. That’s being driven by the potential for Trump to impose tariffs on Europe’s exports, a move that ECB policymaker Joachim Nagel warned risks derailing the German economy.
The trend for wagers on faster and deeper rate cuts in Europe had already preceded Trump’s victory, fueled by stagnating private-sector activity in October. Germany, the region’s largest economy, is also contending with worsening investor confidence and the collapse of its government.
Pressure to act may also come from the ECB reduction of its balance sheet, which is putting upward pressure on borrowing costs, according to a blog post from the central bank. This may provide ammunition for policymakers who insist that further reductions in bond holdings may necessitate a trade-off in the form of even more rate cuts.
