Cut in euro rate still seen as possibility

LONDON (Reuters) – Eurozone money markets see a much lesser chance of a near-term monetary easing after Thursday’s hawkish remarks from the European Central Bank (ECB) chief, but traders say the market has not ruled out the idea of lower eurozone rates. Euribor futures – a barometer of market expectations – are attaching a probability of almost 15 percent of a rate cut by June, dramatically down from around 55 percent last week. Short-term swaps futures, known as Eonia, are pricing in less than a 20 percent chance of a cut by August, down from 100 percent on Thursday morning. ECB President Jean-Claude Trichet said recent economic data was mixed and inflation could edge up in coming months. Analysts said the market would now be more sensitive to economic data and any signs of weakness, particularly in the consumer sector, would quickly reignite rate cut bets. «There is confusion in the market because the perception, given by the news headlines, is that the ECB will adopt a clear easing bias. But Trichet made it clear they have a neutral stance and the market has priced out rate cuts as a consequence,» said Peter Fertig, chief fixed-income strategist at Dresdner Kleinwort Wasserstein. «But if we get weaker data, which we expect, the market would start pricing in rate cuts again. A cut has not been ruled out. It is still on the cards. We expect a rate cut before the (ECB’s) summer recess.» On Thursday, money markets were geared for a small risk of a cut and for Trichet to support his recent dovish remarks which were seen paving the way for a near-term move. But Trichet’s comments, at the news conference after the decision to leave rates steady at 2.00 percent, surprised the market and triggered a sharp sell-off in bonds and rate futures. He said one month’s data had not changed the ECB’s previous assessment that prospects for a slow but steady rebound in the eurozone were balanced. Analysts said that if the euro started to head rapidly back toward record highs, above $1.29, it would revive rate cut speculation. The euro was last around $1.23.

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