The US dollar weakened as risk mood improved after ceasefire news. The euro rose to close to $1.17, while Brent fell to $95 and US 10-year Treasury yields dropped 6bp.
Asian equities and e-mini futures rose, with the Stoxx future up about 5%. US Treasuries showed a bull-steepening move as yields fell.
Ceasefire Impact On Ecb Rate Expectations
Commerzbank said an extended ceasefire would make an ECB rate rise in April, and later, less likely. It pointed to the €STR curve having priced about 80bp of rate rises the prior day, the most since the war began, as a backdrop for bullish steepening in euro rates.
The ECB published a blog post using its Bank Treasurer Survey and Securities Financing Transactions Data. It projected that by year-end, banks holding 50% of total assets will have reached their preferred reserve level, up from 26% previously, which was linked to last October.
The ECB did not publish an aggregate preferred reserve level, unlike the Bank of England’s PMRR measure. Repo markets were described as calm, and year-end conditions were linked to expectations for cheaper Schatz swap spreads.
With the Euro currently trading around 1.1450, the market feels very different from the sharp risk-on rally we saw in 2025. We remember how the ceasefire news back then sent the single currency surging toward 1.17 and pushed Brent crude down to $95 a barrel. The Dollar’s current stability suggests that any similar positive news might not trigger such a strong reaction this time around.
Market Pricing And Options Volatility
The expectations for the European Central Bank have completely inverted from what we saw last year. In early 2025, the market was braced for 80 basis points of rate hikes, a view that collapsed with the geopolitical de-escalation. Today, forward €STR markets are pricing in a 25 basis point rate *cut* by the end of the third quarter, signaling a profoundly more dovish stance from policymakers.
This shift supports positioning for continued bullish steepening in the Euro rates curve through futures and swaps. Traders should look for long-term yields to fall, but at a slower pace than short-term yields, as the market solidifies its expectations for near-term rate cuts. The ECB’s current posture makes fighting this trend a risky proposition in the coming weeks.
Looking at the options market, one-month implied volatility for EUR/USD is hovering near 5.2%, significantly lower than the levels seen during the turmoil of 2025. This makes buying options a relatively cheap strategy right now. We see value in purchasing longer-dated Euro calls to position for any unexpected positive catalysts that could challenge the Dollar’s recent strength.
The predictions from last year regarding ECB bank reserves are also becoming relevant now. The view that reserve scarcity would only begin to exert upward pressure on rates in 2026 appears to have been accurate. Recent data shows a marginal but noticeable tightening in interbank lending, suggesting traders in short-term funding markets should remain alert for signs of stress.
