BNY strategist Geoff Yu argues that European interest rate markets continue to discount too many increases from the European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) despite improved global risk attitudes following the US-Iran ceasefire. He emphasizes that current futures prices remain well above year-to-date levels and sees a better risk-reward ratio in the event of an overtake of increases or even a re-introduction of cuts, particularly for the SNB.

Markets overestimate the European tightening path

“Risk sentiment is rising sharply following the US-Iran temporary cease-fire, but not all asset classes are responding equally. If we characterize the improving risk sentiment as an easing of financial conditions, then the typical manifestations should be stronger equities, lower yields and falling interest rate expectations. As European markets open, prices (via December 2026 futures) of the European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) responded as expected by reducing its reference rate targets at the end of the year amid the sharp decline in energy prices.

“However, current prices remain well above early-year levels, including up to 80 basis points for the BoE and over 50 basis points for the ECB. Swiss interest rates are still expected to rise above zero by the end of the year. All indications are that prices are far from policy targets.”

“The ECB is quite divided, with some members warning that the central bank will need to act even before second-round effects occur. It is therefore striking that BoE and ECB interest rate prices fell by almost the same amount as news of the ceasefire broke, given the differences in policy positions.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)