The latest ECB survey shows that inflation expectations for the next year have fallen to 2.5%, down from 2.9%. Expectations for inflation in three and five years remain steady at 3.0%. Many companies report that trade tensions are affecting their operations, especially those exporting to the US. While 23% of businesses are optimistic about the upcoming quarter, they also note a decrease in profits.

Market Reactions To ECB Position

These developments are not expected to change the ECB’s current stance, as they are still gathering more data. The market anticipates one last interest rate cut by the end of the year. According to the survey highlighted by Dellamotta, we should prepare for a more cautious European Central Bank. The drop in one-year inflation expectations is a notable sign of this. However, a recent flash estimate from Eurostat shows that headline inflation increased to 2.5% in June, creating mixed signals for policymakers. This situation favors yield curve steepener trades, which are based on the differences between short-term and long-term interest rates. While the market has largely accounted for a high chance of another rate cut, falling profits could push the central bank to act more aggressively than expected. Historically, central banks tend to make deeper cuts than initially planned when an easing cycle starts to tackle a slowing economy.

Currency Strategies In Light Of ECB Moves

With the central bank’s plans to gather more information over the summer, we anticipate lower immediate volatility. This suggests that selling short-dated options to collect premium could be a smart move, as major policy changes are unlikely until September. However, we should be ready for increased volatility as important inflation reports and policy meetings approach. The strain on corporate profits and the clear reference to trade tensions with the US should influence our currency derivative strategies. These factors combined with the possibility of ECB rate cuts happening faster than those from the Federal Reserve suggest a bearish outlook for the Euro. We might consider buying puts on the EUR/USD or creating other bearish strategies to benefit from a potential decline towards the 1.05 level seen earlier this year. Create your live VT Markets account and start trading now.

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