BNY Strategist Geoff Yu argues that European rate markets still discount too many hikes for the European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) despite an improvement in global risk sentiment following the U.S.–Iran ceasefire. He highlights that current futures pricing remains well above levels at the start of the year and sees better risk-reward in pushing out hikes and even reintroducing cuts, particularly for the SNB.

Markets overestimate European tightening path

"Risk sentiment is rallying strongly as the U.S. and Iran reach a temporary ceasefire, but not all asset classes are responding equally. If we characterize improvement in risk sentiment as an easing in financial conditions, then the usual manifestations should be stronger equities, lower yields and a drop in policy rate expectations. As European markets opened, pricing (via December 2026 futures) for the European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) reacted as expected, reducing targets for year-end benchmark rates as energy prices dropped sharply."

"However, current pricing remains well above levels at the beginning of the year, including up to 80bp for the BoE and over 50bp for the ECB. Swiss rates are still expected to move above zero by year-end. By all accounts, we believe pricing is far removed from policy objectives."

"The ECB is quite split, with some members warning that the central bank would need to act even before second-round effects came through. Consequently, it is striking that BoE and ECB rate pricing dropped by almost the same amount as ceasefire news filtered through, given how different policy stances are."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)