Market sees a surprising reverse bet: option traders are gambling on the European Central Bank unexpectedly cutting interest rates in 2026, with potential returns of up to 12 times.

Traders are currently placing bets through options on a surprise 25 basis point rate cut by the European Central Bank policy makers at some point this year, which goes against the market's widespread expectations. Several large bets have been made this week on options strategies linked to the three-month euro interbank offered rate. If the ECB does indeed cut rates, these trades could yield a total return of 32 million (approximately $38.3 million), a return rate of up to 12 times. With inflation slightly below target levels and market expectations for the ECB to maintain stable borrowing costs for the year, these operations seem counterintuitive. While policymakers are likely to keep rates unchanged at the annual first meeting next week, the recent surge in the euro has sparked discussions in the market about the possibility of further easing, becoming a new variable that decision-makers need to consider. Kim Crawford, Global Rates Portfolio Manager at J.P. Morgan Asset Management, said, "From a risk-reward perspective, the pricing of 2026 rates appears very attractive. The market currently has not priced in a rate cut, and if the ECB takes action, it can only go in the direction of a rate cut, not a hike." While occasional bets against the market are not uncommon, the sudden activity in these trades may indicate a shift in sentiment. Austrian central bank governor Martin Kohl warned that if the exchange rate rose significantly and led to downward revisions in inflation forecasts, a rate cut might be necessary, leading to increased bets on further easing. A stronger currency can lower import costs, thus easing upward pressure on prices. Earlier this week, concerns about the direction of U.S. policy weakened the dollar, causing the euro exchange rate to rise to its highest level since 2021. The money market currently prices in only about a 25% probability of a rate cut this year. It also expects the ECB's deposit rate to remain at 2% until early next year, continuing the policy stance since the last rate cut in June last year. Lucile Flight, Managing Director of Rates Trading at Barclays Bank, said, "I don't think fluctuations in the euro-dollar exchange rate will lead the ECB to adopt a more dovish stance. The ECB's policy will remain stable." Special Trading Structure What sets these options trades apart is that they lower the cost by betting simultaneously that policy makers will not raise rates. If the ECB raises rates by 25 basis points, it will lead to a loss of about 15 million; if they raise rates by 50 basis points, the loss (including premium expenses) will increase to 35 million. However, most traders typically do not hold positions until expiration. Driven by large bets, the trading volume for call and put options contracts expiring in December surged to nearly 600,000 contracts on Wednesday, more than double the daily average trading volume. Some traders are also placing bets through options that the ECB will maintain rates unchanged. One bet is on rates remaining unchanged until mid-year, with an investment of 1.9 million potentially yielding a return of 2.5 times. Flight of Barclays Bank pointed out that given that the inflation forward market is not showing downward pressure and the impact of energy prices will be more significant than euro exchange rate fluctuations, the expectation of maintaining rates unchanged currently seems reasonable. She said, "This completely rules out the possibility of hiking rates. But I believe there is no basis for further betting on a rate cut on top of that."