€STR futures are showing odds of a 50 bps rate cut to be ~20% currently. But as per money market pricing yesterday, those odds went up to as high as 40% following this report here. I'd say traders are pricing in something somewhere in between that, and perhaps closer to the latter than the former by the slightest.
However, the key takeaway here is that there is scope for that pricing to extend much more.
It goes without saying that the remainder is tied to odds of the ECB cutting rates by 25 bps in December instead. As such, if the PMI data later shows significant worsening in economic conditions in two of Europe's largest economies, that's a big signal for market players to take in and chase further odds of a 50 bps move.
That will be something to watch out for if it indeed plays out this way over the next few weeks especially. At this point, I'd say that the risks are asymmetrical and that softer data will fuel pricing for a 50 bps move. However, stronger data will not phase out rate cuts entirely for December unless there is an absolutely major, major upside surprise on data from both the economy and inflation.
That lays out the backdrop for the euro currency as we head towards the data in just a bit.
