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Traders scale back ECB rate path after French debt stress
Since mid-September, traders have removed about a 0.25 percentage point hike from ECB forecasts, and the Bundesbank two-year yield has eased from 3.32% to 3.02%.
Traders have revised down their outlook for European Central Bank rate hikes, removing about one quarter-point from ECB forecasts since mid-September as they bet the bank will pause in response to a French debt selloff, FXStreet reports.
The view echoes a prior pattern from 2022 and 2023, when traders similarly expected the ECB to stop raising rates during financial stress, but the ECB continued hikes because euro-area inflation stayed above its 2% target. FXStreet notes September euro-area inflation was 3.8% and the ECB deposit rate is 2.50% after hikes in June and September.
FXStreet also points to rate-sensitive bond moves that track expectations for the ECB. Germany's two-year bond yield reached 3.32% on September 28, the highest since October 2008, and has since fallen 0.3 percentage points to 3.02%.
French-German borrowing cost spreads have widened as well, with the gap in 10-year yields reaching 1.54 percentage points on October 2, the widest since 2011, following a large one-week widening tied to France's political and debt-market backdrop, FXStreet adds.