By Yoruk Bahceli, Sara Rossi and Alun John
(Reuters) -Traders on Thursday curbed their bets on another European Central Bank rate cut this cycle, now seeing another move as a coin toss, as the bank sounded sanguine about the economic outlook.
Euro zone rates setters kept their key interest rate on hold at 2% for a second straight meeting but offered no clues about their next move.
ECB chief Christine Lagarde reiterated that the bank remains in a "good place" and said risks to the economy had become
more balanced than before.
"It's pretty much like saying we're on hold now," said Danske Bank chief analyst Jens Peter Soerensen.
Traders now see just under a 50% chance of another ECB rate cut by June 2026, according to ICAP data, up from around 60% before the ECB's decision earlier on Thursday.
Soerensen said the description of economic risks as "balanced" in particular reduced traders' rate cut expectations, adding Lagarde could "always twist this language if she wants to keep the possibility of a rate cut."
Declining bets on a rate cut supported the euro, which was last up 0.4% to around $1.174 .
Germany's two-year bond yield, sensitive to interest rate expectations, was up 4 bps to 1.99%.
Those moves also came as latest U.S. inflation numbers pushed down U.S. yields and appeared to support expectations for a U.S. rate cut next week.
Thursday's policy meeting was the latest development reducing traders' bets on ECB easing in recent weeks. In mid-July, traders had nearly fully priced a rate cut by December.
An EU-U.S. trade deal, a hawkish tone from the ECB and stronger-than-expected growth and inflation data since have all dented market expectations.
While markets reduced their rate cut bets, the bank's economic forecasts highlighted the uncertainty ahead.
The ECB raised its inflation projections for this year and next by a tenth of a percentage point, but cut it by the same amount in 2027 to 1.9%. That means it now projects inflation below target both in 2026 and 2027.
"There is something here for both the hawks and doves," said Divyang Shah, strategist at LSEG's IFR markets.
The slightly higher inflation projection next year supports a view that rate cuts are done, while the below-target forecast in 2027 keeps the door open for another cut, Shah added.
(Reporting by Yoruk Bahceli, Stefano Rebaudo, Alun John and Lucy Raitano; Editing by Susan Fenton and Dhara Ranasinghe)
