Barclays has updated its forecast for the European Central Bank (ECB) rate cuts. Initially, they expected two cuts this year, one in September and another in December. Now, they foresee just one rate cut, which will happen in December. This change comes after considering US tariffs on EU imports and worries about inflation in the medium term.

Terminal Rate Forecast Update

The earlier forecast for the terminal rate was 1.50%, based on expectations about tariffs and inflation risks. While US tariffs matched this expectation, Barclays has decided to remove the September rate cut prediction. This decision was influenced by ECB President Christine Lagarde’s recent press conference and insights from ECB sources, which suggest that policy rates will likely stay the same in September. We are revising our outlook for the ECB’s next steps. A September rate cut now seems unlikely, and a pause in rate changes is more probable. This adjustment follows the latest communications from the central bank, which indicated a cautious approach to easing.

Implications for Trading Strategies

This new outlook should support the euro in the upcoming weeks. Since the EUR/USD exchange rate has already strengthened above 1.09, strategies that bet on the euro maintaining its value or increasing further appear wise. The market is adjusting to the idea that the gap between European and US interest rates may not decrease as quickly as we previously thought this year. For those trading interest rates, it’s essential to raise short-term rate expectations for September. The most recent estimate for Eurozone inflation in June was a stubborn 2.5%, giving the ECB good reason to wait before a rate cut. This suggests that positions aimed at a September cut, as seen in Euribor futures, are at odds with the central bank’s clear message. European equities now face challenges from both higher interest rates lasting longer and a slowdown in global trade. The recent 15% US tariffs on major EU exports, which were highlighted earlier this month, will soon begin to affect corporate earnings. Traders may want to consider protective put options on major indices like the DAX or Euro Stoxx 50 to guard against potential declines in August and September. The tension between slowing growth and a cautious central bank could lead to increased market volatility. This situation echoes past cycles, like in 2022, when markets had to adjust their expectations following the ECB’s cues. Positioning for an increase in the VSTOXX index, Europe’s primary gauge of volatility, could be a smart strategy during the quieter month of August. Create your live VT Markets account and start trading now.

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