Italy’s Deputy Prime Minister and Foreign Minister, Antonio Tajani, has urged the European Central Bank (ECB) to lower interest rates further and consider new measures to support European industry. He highlighted the importance of making credit more accessible for small and medium-sized enterprises (SMEs), warning that the strong euro is hurting competitiveness. Tajani noted that with inflation steady at 2%, there’s room to lower rates from the current 2% down to zero. He proposed reviving quantitative easing, where the ECB would buy government bonds as it did during the Covid crisis. Additionally, he recommended raising the “SME Supporting Factor” limit from €2.5 million to €5 million quickly, to help SMEs access credit.

Central Bank Meeting Outlook

The ECB is set to meet on September 11, and most anticipate that it will keep rates the same. Some reports suggest that the ECB may begin cutting rates in 2025. Officials like Kazaks believe that rates are in a good place, focusing now on economic observations, while Lagarde pointed out job stability in the Eurozone even as inflation decreases with little effect on employment. There’s a clear divide between political pressures for rate cuts and the central bank’s cautious approach. This creates tension leading up to the ECB’s meeting on September 11. Currently, the market expects rates to remain unchanged, opening up opportunities for surprises. With Eurozone inflation stabilizing around the 2% target throughout much of 2025, similar to the trends seen in 2024, the ECB’s reluctance to lower rates is interesting. Buying options on interest rate futures, such as those linked to Euribor, could be a smart move to prepare for any surprises in the ECB’s decisions. These options are relatively cheap given the market’s consensus that rates will stay the same, offering potential for significant returns.

Impact of Euro’s Strength

The euro’s strength, around 1.10 against the dollar, poses a challenge for economies reliant on exports. Political pressure from a major economy like Italy might influence the currency, even if the ECB maintains its rates. It could be wise to buy inexpensive, out-of-the-money EUR/USD put options that expire after the September meeting to protect against or speculate on a possible shift in the ECB’s guidance. This clash between political leaders and central bankers creates uncertainty, which is often overlooked during calm summer months. Looking at volatility indexes like the VSTOXX, which tracks EURO STOXX 50 options, we see that implied volatility is low, indicating expectations of a quiet meeting. Purchasing VSTOXX futures or call options could be a good way to profit if political issues prompt the ECB to engage in a more heated discussion, regardless of the final decision on rates. The push to ease credit for SMEs points to a general economic weakness. In 2023 and 2024, SME lending surveys showed significant indicators of economic activity. If this topic gains traction, it could bolster European equity indexes tied to the domestic market, creating opportunities in options on small-cap or domestically directed ETFs. Create your live VT Markets account and start trading now.

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