Investors trimmed their expectations of how aggressively the ECB would hike eurozone interest rates on Friday with global macroeconomic shocks prompting some short-term caution over the growth outlook. Overnight rates corresponding to the European Central Bank's next meeting in April were around 7 basis points off their recent peak, suggesting investors saw some risk the bank would back away from the strong signal it sent last week that rates would begin rising next month.
The move came as pessimism grew over whether European leaders will deliver on their promise of comprehensive measures to tackle the debt crisis at an end-March summit. "The environment is not normal and is deteriorating, so probably some investors are now pricing in some adjustment to the rate hike cycle. And the later the ECB starts, the less time we will have for them to come up with three hikes by December," said Kornelius Purps, strategist at Unicredit in Munich.
Despite the moderating of expectations across the curve, a rate hike was still seen as highly likely in April, leaving more trading opportunities in longer-dated rates, analysts said. The overnight index swaps curve suggested the market was now pricing in two hikes by the ECB's December meeting, with a 75 percent chance of a third, compared to earlier this week when three rises were fully priced in. The ample surplus saw overnight rates edge lower, relieving pressure further up the curve where three month Euribor slipped to 1.173 percent.