The Eurozone’s final Consumer Price Index (CPI) for June is 2.0% year-on-year, confirming earlier estimates. Previously, the figure was 1.9%. Core CPI, which omits volatile items like energy and food, is also confirmed at 2.4% year-on-year. This figure has not changed from the previous month.

Monetary Policy Implications

These CPI figures support the European Central Bank’s (ECB) choice to pause interest rate changes during the summer. The stable inflation suggests there is no immediate need for adjustments in monetary policy. Latest Eurostat data shows inflation is at the ECB’s target, reinforcing expectations for an extended pause. This lack of quick policy changes will likely drive the market for the next few weeks. Traders should prepare for a time of less directional certainty. With President Christine Lagarde indicating a steady approach through the summer, implied volatility in equity markets is expected to decrease. The VSTOXX, Europe’s main volatility measure, is already trading low at 14.5, a sharp drop from earlier highs this year. This situation makes selling options premiums an appealing strategy.

Market Expectations And Strategy

This steady policy approach supports the front end of the yield curve, keeping short-term interest rate swaps stable. For example, derivatives on German 2-year government debt show little change is expected until at least September. We think it is too early to bet on a steepening yield curve. Historically, when central banks remain inactive, like in the second half of 2023, markets often stay within a certain range, benefiting volatility sellers. For instance, selling monthly strangles on the Euro Stoxx 50 index reliably yielded positive returns during that period. We anticipate a similar trend this summer. We recommend traders look into calendar spreads on major indices. By selling a front-month option to take advantage of time decay and buying a later-dated option, traders can position themselves for a potential rise in volatility after the summer break. This approach is a cost-effective way to prepare for possible shifts in the fall. Create your live VT Markets account and start trading now.

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