By Yoruk Bahceli and Naomi Rovnick

(Reuters) – Traders raised their bets on quick-fire European Central Bank (ECB) rate cuts on Thursday, interpreting the bank's first consecutive rate cut in 13 years as a signal that a more accelerated easing cycle has begun.

A worsening economic outlook and signs that inflation is increasingly under control led the ECB to reduce its deposit rate by 25 basis points (bps) to 3.25%, following a September reduction. This marks the first back-to-back rate cut since 2011.

Policymakers reiterated that they were not committing to a specific rate path and would maintain a restrictive monetary policy as long as needed to ensure inflation was contained.

Hearing minimal resistance from ECB chief Christine Lagarde regarding market expectations, traders increased their rate-cut bets and pushed the euro down further.

"Lagarde emphasized that the ECB is data-dependent," remarked Seema Shah, chief global strategist at Principal Asset Management. "Given the economic weakness across the euro area, there is more urgency for the ECB to deliver consecutive rate cuts."

Indeed, ECB governors anticipate a rate cut in December unless there is a significant economic turnaround, sources informed Reuters on Thursday.

Traders are now pricing in about 29 bps worth of cuts for the December meeting, having previously fully anticipated a 25 bps cut earlier on Thursday. This suggests a market expectation of over a 15% chance for a 50 bps cut at that meeting.

"The markets will now wonder whether it will move by 25 bps or by 50 bps in the next meeting," stated Marchel Alexandrovich, economist at Saltmarsh Economics.

Thereafter, the markets foresee a high probability of consecutive rate cuts through next June.

Germany's rate-sensitive two-year bond yield reached its lowest level since October 4, and eurozone stocks maintained their gains. However, the euro slid to $1.0811, reaching its lowest point since early August.

EURO RISKS

Following Thursday's rate cut, traders expect the ECB to implement approximately 160 bps of rate cuts by the end of 2025, compared to 145 bps from the U.S. Federal Reserve and just over 135 from the Bank of England.

Speculation that Thursday's actions signal the beginning of back-to-back rate cuts has benefitted eurozone government bonds. Although these bonds have lagged behind U.S. Treasuries this year, they have outperformed thus far in October.

Eurozone government bonds have gained 0.1% since early October, while Treasuries have resulted in a 1.2% loss for investors as the yield premium of Treasuries relative to German bonds has widened significantly.

Nonetheless, the euro, which has faced significant pressure this month, has declined about 3% since the end of September. This decline followed an unexpected contraction in eurozone business activity that fueled heightened expectations of Thursday's rate cut, coinciding with reduced wagers on a second major Fed rate cut in November, which has consequently bolstered the dollar.

Analysts identify uncertainty surrounding the upcoming November 5 U.S. presidential election and the potential for a Donald Trump victory as key risks for the euro. The former president has proposed blanket tariffs of 10% to 20% on nearly all imports, which would undoubtedly negatively impact the eurozone economy. Lagarde also noted this as a downside risk on Thursday.

While such tariffs might initially be inflationary, according to Mariano Cena, senior European economist at Barclays, the long-term effects would likely negatively influence the investment outlook and consumer sentiment, leading to further ECB easing.

Matthew Landon, global market strategist at JPMorgan Private Bank, anticipates the euro to trade within the $1.07 to $1.11 range, but noted it could skew approximately 3-4% lower if higher tariffs become a genuine possibility following the election.

"The euro especially appears vulnerable, and it has been one of our preferred shorts leading into the U.S. election," he commented.

The prospects for the ECB and eurozone markets are further complicated by the performance of the U.S. economy, which has consistently surprised traders this year.

In fact, stronger U.S. retail sales tempered expectations for Fed rate cuts on Thursday, adding to the euro's challenges.

"There’s no growth driver in the euro area, but the U.S. acts as a global growth driver," stated Danske Bank chief analyst Piet Christiansen. "If robust U.S. jobs data continues into the end of the year, it could present upside risks to rates."