Muller from the European Central Bank (ECB) has noted that recent data aligns well with their latest forecasts. Despite global challenges, such as US trade policies and the Ukraine war, the European economy stays strong. Market analysts estimate a 30% chance of an ECB interest rate cut by year-end, but no rate changes are expected next week.

Current Economic Data

Data shows that we are on the expected track, suggesting a wait-and-see approach for interest rates. The flash estimate for August 2025 inflation is 2.4%, still above the 2% target, making immediate cuts unlikely. The economy is proving its strength, effectively dealing with trade tensions and the war in Ukraine. Although the market predicts a 30% chance of a rate cut by year’s end, this seems out of sync with the ECB’s cautious tone. This suggests that trading strategies like selling December 2025 Euribor futures could be beneficial. We believe a rate cut is less likely than the market implies. Holding this position should reduce short-term market volatility across various asset classes. After the 2023 rate hikes, we saw a similar trend where volatility for indices like the Euro Stoxx 50 gradually fell during the central banks’ extended pause. Traders might find it useful to implement strategies that leverage this stability, like selling short-term options strangles.

Foreign Exchange Market Dynamics

In the foreign exchange market, this message is supportive of the euro, especially against currencies where central banks seem more inclined to ease. For instance, weak labor market data from the UK has raised expectations for a Bank of England rate cut, making long EUR/GBP positions a strong relative value trade. This outlook challenges the idea that the euro has limited growth potential from here. The central bank’s confidence is based on surprisingly strong economic activity. Eurozone GDP for the second quarter of 2025 was +0.4%, which goes against earlier fears of a slowdown. This resilience indicates that the current policy rate isn’t too strict, further reducing the need for rate changes in the coming months. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now