ERZ4 Getting Closer To Double Bottom Support

ERZ4 futures have fallen by ~65bp in February.

• ECB-dated OIS shows 85-90bp of cuts during ‘24.
• Those that believe the ECB will deliver more cuts than the market prices may look to start scaling into long ERZ4 positions if the contract moves 10-15bp lower (ahead of 75bp of cuts being priced for '24).
• On top of this, technical support is seen at the Nov ’23 double bottom (96.810/815).
• June '24 seems like the preferred ECB meeting to start the cutting cycle at present .
• Assuming the ECB does implement its first 25bp rate cut in June, it would have to cut rates by 25bp at 2/4 remaining ’24 meetings to achieve 75bp of cuts this year.
• Our policy team’s most recent sources piece suggested that GC members see a range of 50-100bp of cuts in ’24, with 75bp obviously falling in the middle of that range.
• Risks to any potential long Euribor positions include momentum, which has been notable since late Nov.
• Furthermore, the dovish Governor of the Maltese central bank (who is open to a March ’24 cut) recently told us that that a majority of the ECB GC remains sceptical that inflation has come down quickly enough to justify easing policy.
• That, coupled with the need to keep financial conditions tight enough, suggests that hawkish risks will remain until another move lower in inflation is seen.

Fig. 1: Euribor December ’24 Futures (ERZ4)