STIR: Downside Risk To SONIA/Euribor Dec '26 Spread Remains Evident

The December ’26 SONIA future (SFIZ6) has extended on yesterday’s outperformance vs. Euribor (ERZ6). This leaves the SFIZ6/ERZ6 spread at the lowest level since late September (154.5bp last), ~10bp off month-to-date closing highs.

• We think the market has more room to reprice a dovish BoE outlook than a dovish ECB outlook, which points to the risk of further downside in the SFIZ6/ERZ6 spread.
• The next level of downside interest comes in at the September closing low, 153bp. A meaningful break there would expose cycle closing lows at 145bp.
• Downside risks to the spread remain evident, given the relatively shallow pricing of the BoE cutting cycle. ~10bp of easing priced through year-end, with the next cut not fully discounted until the March MPC.
• Yesterday’s data showed the UK labour market continues to slow, signalling a need for further easing. However, sticky inflation data had previously deferred the pricing of further easing and presents a risk to dovish views.
• Meanwhile, ECB rhetoric points to monetary policy being in a “good place”, suggesting the bank is nearing the end of the easing cycle.
• Markets still price greater-than-even odds of one further ECB cut in the cycle, with several Governing Council members noting the risks to inflation are skewed towards the downside.

Fig. 1: SONIA/Euribor December ’26 Futures Spread (SFIZ6/ERZ6)

Source: MNI - Market News/Bloomberg Finance L.P.