The market bets that the European Central Bank will take no action this week, but there is still disagreement on the prospect of rate cuts next year.

Current market pricing shows that the probability of the European Central Bank (ECB) continuing to stand pat on Thursday is very high. After all, the recent strong economic data in the Eurozone, the tariff policies initiated by the Trump administration, and the ongoing trade tensions between China and the US are still waiting to be observed for their substantial impact on the Eurozone economy. However, the interest rate futures market still remains uncertain about whether the ECB will open the door to rate cuts again next year, as traders have differing opinions on the ECB's monetary policy expectations for 2026. Henry Cook, a senior economist at the Japanese financial giant Mitsubishi UFJ Financial Group (MUFG) in London, recently released a research report stating that he expects the interest rate decision to remain unchanged, mainly due to inflation nearing the target, interest rates on a neutral trajectory, and the latest PMI data being robust. The market focus will be on assessing inflation risks. For 2026, Cook maintains his expectation for further easing of the ECB's monetary policy in 2026. It is understood that traders in the current interest rate futures market are undecided on whether the ECB will resume easing policies next year, but they generally bet that the ECB will likely announce another pause in rate cuts on Thursday, continuing to hold off on lowering interest rates. Earlier this month, US President Donald Trump announced additional tariff policies on Chinese imports, initially causing market concerns about a significant escalation in trade risks. Therefore, compared to September, there was a significant shift in trader pricing, with about an 80% probability priced in for a resumption of rate cuts in 2026; however, the ECB's tough stance earlier caused some traders to eliminate expectations of such measures. Some economic data released last week showed that the Eurozone economy is regaining growth momentum, and Trump stated that he hopes to reach a positive and mutually agreed trade agreement with China this week, prompting traders to reduce their bets on a resumption of rate cuts in 2026. The latest pricing in the interest rate futures market shows that the probability of the ECB restarting rate cuts by the end of 2026 is slightly less than 50%. Unlike some interest rate futures traders betting on the ECB pausing rate cuts for the whole of 2026, Cook, the economist at MUFG in London, maintains his expectation for further easing of the ECB's monetary policy in 2026. MUFG states that German fiscal stimulus may gradually intensify starting in 2026, the strengthening Euro against the backdrop of ongoing US tariff policies, global trade uncertainties continuing to suppress economic growth, and Eurozone wage growth likely to cool quickly, all pave the way for inflation to persist below the ECB's target, thereby pushing the ECB to restart rate cuts in 2026 to stimulate economic expansion. Cook stated that ECB policymakers are clearly satisfied with the current Eurozone economy and the monetary policy path, as inflation continues to hover near the target and interest rates remain neutral, especially with healthy PMI readings alleviating concerns about recent downside risks to Eurozone economic activity. Cook expects this meeting to be a "low-key monetary policy meeting," with the focus likely on assessing inflation risks and ECB President Lagarde's press conference Q&A. Cook also added that the preliminary GDP figures for the Eurozone's third quarter will be released ahead of the ECB interest rate decision, as well as German inflation data for October and the overall HICP (Harmonized Index of Consumer Prices) for the Eurozone. He believes the ECB has a good understanding of this data and it might not necessarily impact the monetary policy decision on Thursday. "Any degree of GDP weakness (we track a month-over-month change of about 0.0%in line with the ECB's expectations) will be offset by unexpectedly strong PMI data for October, which shows that the downside risks to the Eurozone economy may have significantly diminished. The Eurozone Composite Output Index (i.e., Composite PMI) rose to a 17-month high of 52.2, highlighting a significant rebound in Eurozone output prices despite political turmoil in France and weak data in Germany." Cook wrote in his research report. Looking ahead, Cook expects German fiscal support to take effect starting in 2026, but the overall fiscal stance of the Eurozone may appear more neutral, with France, Italy, and other countries consolidating budgets. Meanwhile, the drag on economic growth caused by US tariff policies is expected to continue. Therefore, Cook predicts a clear downward trend in forward-looking inflation indicators, coupled with a stronger Euro likely to push down import prices, leading him to believe that at some point in 2026 the ECB may restart the rate cut process under the context of persistently low inflation below the 2% anchor target and a relatively weak labor market environment.