Investors scaled back bets for European Central Bank interest rate hikes beyond July on Friday, as uncertainty over Greece and the strength of the eurozone recovery offset hawkish comments from ECB policymakers. Euribor lending rates were fixed at a fresh two-year high of 1.469 percent as ECB President Jean-Claude Trichet flagged a rate hike in July by saying on Thursday the inflation outlook warranted "strong vigilance".
But the ECB refrained from signalling future rate moves and growing uncertainty over a solution to Greece's debt problems prompted investors to scale back bets for rate hikes in the last quarter of 2011. Euribor interest rate futures were broadly higher between June and September contracts. "I think that maybe the peripheral situation is creating some worries for the market," said Alessandro Giansanti, strategist at ING.
Interest rate futures had unwound some bets of a rate hike beyond July, analysts said. Analysts were confused by the market reaction after what they saw as a balanced to hawkish tone by Trichet on Thursday. What explained the move higher in Euribors was appetite for safe-haven assets as the prospects of an impasse on the Greek debt problem pushed spreads between peripheral bonds and German Bunds wider, they said. There were also worries that problems in peripheral countries could further derail a fragile recovery.
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