STIR: Front-end Of Euribor Strip Bear Steepens; H6 Still Implied Terminal

The action in the Euribor strip following today’s hawkish leaning ECB decision has been concentrated at the front-end. The Euribor implied terminal rate is still indicated by the H6 contract, but has climbed to 1.80% from yesterday’s 1.71% after Lagarde stressed that policy is in a “good position to navigate the uncertain conditions that will be coming up”.

• The M5/H6 spread has bear steepened, now at -20.5 ticks from a -27.0 tick close yesterday.
• Lagarde downplayed the downgrade to the ECB’s June inflation projections, noting the important role of energy prices and the exchange rate. Meanwhile, she said that the growth impact of US tariffs will “impact predominantly in 2026 and will then be significantly offset by the expected investment in both military equipment and construction.”
• Beyond the H6 contract, the implied yield curve has shifted up slightly but the steepness is little changed. Implied hikes from H2 2026 reflect an expected impulse from German/EU fiscal spending, and a fading negative impact from trade tensions. The market appears happy with the current shape of the curve from H2 ’26 onwards until further details around fiscal spending are made available. The German 2025 budget and 2026 budget outline (due ahead of the July decision) will be important here.
• The H6/H7 spread is currently 20.5 ticks, unchanged from yesterday’s settlement.
• In OIS, there are now just 14.5bps of easing priced through the next projection meeting in September (vs 20bps at yesterday’s close). Meanwhile, there are 24bps of cuts priced through year-end, down from ~31bps just before today’s decision and also at yesterday’s close.
• Although Lagarde seemingly raised the bar to a July cut, growth risks remain tilted to the downside and one more cut to 1.75% later this year certainly remains conceivable.
• Immediate focus turns to the usual post-decision sources pieces from various news outlets.