German states shared their inflation data for July, showing different results. Bavaria reported a year-on-year increase of 1.9%, up from 1.8% last month. In North Rhine Westphalia, the Consumer Price Index (CPI) stayed the same at 1.8% year-on-year. Saxony saw a drop, with the CPI going from 2.2% to 1.9%. Meanwhile, Baden Wuerttemberg’s CPI remained steady at 2.3%.

National Inflation Rate Projection

These varying results suggest that the national inflation rate might be around 1.9% or 2.0%. The core inflation rate, which was 2.7% in June, is important and is expected to stay stable in July. The European Central Bank (ECB) is closely monitoring these numbers as they manage economic conditions through the summer. The steady core figure highlights ongoing economic issues in the eurozone. We are observing mixed inflation signals from the German states today. This likely means the national figure will remain near the ECB’s 2% target, but that’s not the complete picture. The main concern is core inflation, which has stubbornly stayed above 2.5% all year, keeping policymakers anxious.

Monetary Policy Outlook

This data complicates matters for the ECB, which has kept its main rate at 2.75% since spring. Markets had expected at least one more rate cut before the end of the year, a view that now seems uncertain. The latest Eurozone core HICP estimate for June came in hot at 2.8%, leaving the bank little room to relax its policy. For derivatives traders, this ongoing uncertainty is likely to keep volatility high in the coming weeks. The VSTOXX index, Europe’s main fear gauge, has been rising from its lows and is currently around 18. This situation can favor strategies that benefit from time decay and sideways markets, like selling short-dated options strangles on the DAX index. We should also reassess positions linked to short-term interest rates. Looking at Euribor futures, the market will probably delay expectations for a rate cut from September to late 2025 or even early 2026. This scenario is similar to 2023 when betting against central bank shifts proved profitable for traders who believed the inflation data. Considering the risk that markets may be underestimating the ECB’s determination, it makes sense to hold some downside protection. Buying out-of-the-money puts on the Euro Stoxx 50 index is pricier now, but it provides a hedge against a hawkish surprise from policymakers. This could be a smart move before the official Eurozone inflation figures come out next week. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now