The euro fell after the European Central Bank’s (ECB) latest update. The ECB’s inflation predictions stayed mostly the same, now expecting the 2025 Harmonized Index of Consumer Prices (HICP) to be 2.1%, up from 2%. For 2026 and 2027, the forecasts changed slightly to 1.7% (from 1.6%) and 1.9% (down from 2.0%), respectively. The market may see the lower 2027 figure as a sign of a possible rate cut, although current market predictions still hold a 40% chance of a rate change by year-end.

GDP Growth Forecasts

The GDP growth forecasts have little effect on market sentiment. The 2025 growth is expected at 1.2%, up from 0.9%, while 2026 is slightly lower at 1.0%, down from 1.1%. The forecast for 2027 stays the same at 1.3%. The euro has only dropped by about 15 pips, which is not significant. We need to wait for more details from Lagarde’s press conference to gain additional market insights. The ECB’s inflation forecasts are generally on track, meaning we shouldn’t expect any surprising policy changes soon. With inflation likely to stay around 2%, the central bank appears to be taking a cautious approach. This suggests that major fluctuations driven by ECB policy are improbable, indicating a phase of lower market volatility. Recent market data supports this low-volatility view, as 1-month implied volatility for EUR/USD options has fallen below 6%—a level we haven’t consistently seen since early 2024. The GDP growth estimate of just 1.2% for 2025 further reduces the chances of economic surprises that could boost the euro. These conditions are favorable for strategies that thrive on time decay and minimal price movement.

Subtle Dovish Tilt

A slight dovish tilt, shown by the lower inflation forecast for 2027, indicates gentle downward pressure on the euro, especially when compared to the US. Recent US job data revealed continuing wage growth at 4.1% year-over-year, which keeps the Federal Reserve on a more aggressive path than the ECB. This policy difference suggests that the euro’s upward potential is limited. In the coming weeks, we should think about selling option premiums instead of buying them. Strategies like selling out-of-the-money bear call spreads on the euro might work well. This allows us to earn premiums based on the expectation that the EUR/USD will stay within a certain range or drift slightly lower while clearly defining our risk. Create your live VT Markets account and start trading now.

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