Eurostoxx futures have risen by 0.2% in early European trading. German DAX futures are up by 0.3%, while French CAC 40 and UK FTSE futures have each gained 0.2%. US futures seem less active today, but European indices are holding steady after a moderate week. The German DAX is trying to bounce back from last week’s drop, while the French, Spanish, and Italian indices have already improved from last week. Yesterday, Wall Street saw broad gains, mainly driven by financial stocks, with the Dow leading the way.

European Equities Keep Pushing Forward

European equities are keeping their momentum as we approach next week’s Federal Reserve meeting, which could sway market movements. There’s a positive trend in European markets, which is encouraging after last week’s declines. However, this steady performance feels more like a pause. The main concern for investors is the Federal Reserve’s decision on interest rates next week. The latest US inflation data from August 2025 showed a rate of 3.4%, slightly higher than expected. This complicates the Fed’s decisions. The CME FedWatch tool suggests a good chance of a pause in rates, but their wording will be crucial. We should brace for volatility, as any hint of future rate hikes could easily unsettle the market.

Effects of the ECB’s Cautious Approach

In Europe, the scenario is different. The European Central Bank is taking a more cautious approach due to weaker economic signals. This is evident in the German DAX, which is still trying to keep pace with its counterparts. This difference in policy could create opportunities in currency trading, such as betting on the dollar gaining strength against the euro. With the VIX index around 15, implied volatility is relatively low before such a big event. This may be a good time to buy protection through put options on major indices like the S&P 500. A surprise hawkish statement from the Fed could quickly spike volatility, making those positions profitable. We recall a similar situation in 2023 when the Fed paused its rate hikes but left the possibility open for future increases. That led to volatile markets for months as each data release was closely scrutinized. This history suggests that even with a Fed pause, we shouldn’t expect an immediate smooth rally. The recent strength in financial stocks is noteworthy, as they typically thrive in a higher-for-longer interest rate setting. This could mean a strong pairs trade opportunity in the coming weeks. We might look into call options on financial ETFs while considering puts on interest-sensitive sectors like technology or utilities. Create your live VT Markets account and start trading now.

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