Euro zone money markets see much less chance of a near-term monetary easing after Thursday's hawkish remarks from the European Central Bank chief, but traders say the market has not ruled out the idea of lower euro zone rates. Euribor futures -- a barometer of market expectations -- are attaching a probability of almost 15 percent of a rate cut by June, dramatically down from around 55 percent last week. Short-term swaps futures, known as Eonia, are pricing in less than a 20 percent chance of a cut by August, down from 100 percent on Thursday morning. ECB President Jean-Claude Trichet said recent economic data was mixed and inflation could edge up in coming months. Analysts said the market would now be more sensitive to economic data and any signs of weakness, particularly in the consumer sector, would quickly reignite rate cut bets. "There is confusion in the market because of the perception, given by the news headlines that the ECB will adopt a clear easing bias. But Trichet made it clear they have a neutral stance and the market has priced out rate cuts as a consequence," said Peter Fertig, chief fixed income strategist at Dresdner Kleinwort Wasserstein. "But if we get weaker data, which we expect, the market would start pricing in rate cuts again. A cut has not been ruled out. It is still on the cards. We expect a rate cut before the (ECB's) summer recess."
SENSITIVE TO DATA
On Thursday, money markets were geared for a small risk of a cut and for Trichet to support his recent dovish remarks that were seen paving the way for a near-term move. But Trichet's comments, at the news conference after the decision to leave rates steady at 2.00 percent, surprised the market and triggered a sharp sell-off in bonds and rate futures. He said one month's data had not changed the ECB's previous assessment that prospects for a slow but steady rebound in the euro zone were balanced, even though weak consumer spending remained a risk. While bonds sold-off heavily in a kneejerk reaction, analysts said Trichet did not close the door on rate cuts. "They do leave a possibility of a rate cut open. But is is all dependent on the data," said UBS strategist Meyrick Chapman. "The danger is we are going to be more sensive to data. The main driver for the market would be the U.S. once again. We are also going to be more sensitive to euro zone data than we were at the beginning of the year." Analysts added that if the euro started to head rapidly back toward record higher above $1.29 , that would also revive rate cut speculation. The euro was last around $1.23. This year, money markets have been extremely volatile as the market tried to determine whether euro zone rates had bottomed out. These sharp swings sentiment and the market is likely to continue, traders said. They added that Trichet's comments have made it more difficult for the market to guess the timing of a possible cut. "I think they will still cut in June. But I'm shooting in the dark. I am still trying to get my head round it and trying to work out what they are playing at," said a trader in London.///