LONDON: Money markets have ditched nearly all the bets they placed on the European Central Bank cutting its overnight deposit rate below zero, as data showed the economic downturn in the euro zone may be slowing.
A survey on Monday showed the euro zone's manufacturing slump eased markedly in May and, following last week's data showing an uptick in inflation, eased pressure for the ECB to cut rates at its meeting on Thursday, some analysts said.
Comments by some ECB board members that the bank was not yet ready to lower into negative territory the rate it pays commercial banks to hold their money overnight have also prompted traders to price out such a move in coming months.
Short-term money market rates have risen near their highest levels in almost three weeks, having fallen near zero early last month after ECB President Mario Draghi said the bank was ready for a negative deposit rate.
"Judging from macro data there's less reason for the ECB to be as dovish as previously so perhaps people are wondering whether they will keep up talking about negative rates," said Benjamin Schroeder, a strategist at Commerzbank in Frankfurt.
"When we look at Eonia forwards the chances for a deposit facility rate cut have been priced out. The refi rate cut is more difficult to assess from the data."
One-year fixed-term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, were up at 0.08 percent, having gradually risen from mid-December lows of nearly zero percent hit a month ago.
Forward euro overnight Eonia rates dated for future ECB meetings have also rebounded across the 2013-2014 strip, with the lowest point in September now around 0.063 percent from around 0.03 percent a fortnight ago.
Eonia rates have traded about 8 bps above the deposit rate in recent months. The slight inversion of the Eonia curve, where one-year rates are lower than the Eonia overnight borrowing cost , which was last at 0.11 percent, meant the market was pricing a very slim chance of a cut in the overnight deposit rate in the next three months.
"We expect the ECB to remain on hold at this week's meeting and to continue to signal the possibility of further policy rates cuts if the worsening of the growth/inflation outlook warrants it," Barclays Capital strategists said in a note.
"Noteworthy, since the May 2 meeting, the rhetoric has continued to focus on the possibility of a negative depo rate, but it has turned more prudent over the last few days as several ECB members highlighted the risks."
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