At the beginning of June, we noted in Three Curves, One Message that “the Eurozone is in a fragile state, and simply can’t handle 3-4 hikes over the coming 12 months.” Since then, the ECB has hiked twice (the second this afternoon), with futures pricing in 40bps of further hikes through to year-end.
Although we haven’t been as explicit in recent commentary on the monetary policy actions of the ECB, we want to reaffirm our view that hiking twice through to year-end would be a policy mistake.
Even though we don’t fight rate pricing for the October or December meetings, targeting a reversal in 2-year Bunds looks attractive.