The European Central Bank shared the results of its consumer expectations survey for July 2025. People expect inflation to be steady at 2.6% over the next year, which is still above the ECB’s target of 2%. The decline in these expectations appears to have paused. In fact, 84.8% of those surveyed believe prices will rise in the next 12 months. This is the highest percentage since April. More information can be found on the ECB’s website.

Inflation Concerns

The recent consumer survey shows inflation expectations for the upcoming year are at 2.6%. This is concerning since it’s well above the ECB’s target of 2%. The flash inflation estimate for August 2025 recently came out, revealing an unexpected rise to 2.7% due to increased costs in energy and services. This indicates that efforts to bring inflation back to the target are struggling. This information puts pressure on the view that the European Central Bank might cut rates in early 2026. As the next policy meeting is only weeks away in September, we think the bank will need to adopt a tougher stance. The chances of maintaining higher rates for a longer period have significantly increased. To respond, we’re looking at interest rate futures linked to EURIBOR, which appear undervalued for a more aggressive policy stance. Traders might want to lock in fixed rates on short-term interest swaps or buy puts on bond futures to guard against rising yields. These actions could be beneficial if the market adjusts its expectations for when rates might be cut.

Market Strategies and Volatility

This uncertainty is likely to heighten market volatility, similar to what we observed in 2022-2023 whenever inflation data surprised on the upside. As a result, strategies that profit from larger price movements, like purchasing straddles on the Euro Stoxx 50 Volatility Index (VSTOXX), could be effective. A more assertive ECB would likely boost the Euro, making call options on the EUR/USD currency pair a consideration. This perspective is bolstered by a strong labor market, with Eurozone unemployment recently reported at a low of 6.3%—the lowest in decades. This tight labor market continues to drive wage growth and services inflation, leaving the central bank with little flexibility to ease policies. Therefore, any trades relying on a quick return to lower rates seem increasingly risky. Create your live VT Markets account and start trading now.

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