Yesterday (December 9), there was a sudden major development at the European Central Bank—rate cuts in 2026? Basically off the table.

Last Friday, the market still thought there was a 15% chance of a 25 basis point rate cut in July, but this week that probability dropped to zero. Bloomberg did a survey, and now a bunch of analysts think rate cuts might be off the agenda for a while; there’s even a chance of a rate hike in the second half of the year. Why? Mainly because back in November the central bank said there was "no rush to inject liquidity," then inflation rebounded to 2.1%, and the Eurozone’s economic growth forecast was revised up to 1.2%.

As soon as the news broke, the market went wild. European short-term rates shot up like a rocket, with three-month Euribor surging to 3.76%. Those who were betting on rate cuts got caught off guard, and interest rate swap pricing inverted by 15 basis points. The euro soared 140 points against the dollar, jumping to 1.0720. The bond market took an even bigger hit, with German 10-year bond yields jumping 12 basis points to 2.68%. On the other hand, bank stocks were euphoric, with the European banking sector index rising 2.8% in a single day.

In short, the market is now reassessing the resilience of the European economy. But Lagarde’s team is in a tough spot—having to watch inflation without crippling the economy. Policy in 2026 is likely to be more cautious, with “pause and watch” possibly becoming the new normal. The valuation logic for euro assets may need to be completely recalculated.

Bitcoin, Ethereum, and other crypto assets may be indirectly affected in the short term by tighter euro liquidity, so it’s worth keeping an eye on their subsequent movements.