The European Central Bank’s (ECB) current policy is considered suitable, according to Vice President Luis de Guindos. He recommends a cautious approach because the economic situation is uncertain. Growth for the second half of the year is anticipated to be similar to that of the second quarter. Risks from fiscal policy are becoming clearer and are balancing growth risks.

Market Valuations

Market valuations are quite high, which requires close attention. The current economic conditions call for a careful and cautious strategy going forward. Right now, the European Central Bank’s policy suggests no major changes are coming soon. The ECB is in a wait-and-see mode, having kept the main deposit rate steady at 3.00% earlier this month. This strategy reflects the uncertain economic climate. The growth outlook is not strong. The second half of 2025 is expected to show the same weak growth of 0.1% we saw in the second quarter. With inflation in August still at 2.2%, the bank has no reason to cut rates, which could cause prices to rise again. This keeps short-term interest rates in a tight range. For traders, this indicates that the implied volatility in front-month EURIBOR options might be too high. It creates a chance for premium-selling strategies. Selling strangles or straddles could lead to profits as long as the ECB stays cautious. We don’t expect any major policy changes until at least spring 2026.

Market Vulnerability

There are also concerns about elevated equity market valuations. The STOXX 600 index is near its all-time high of 530, which seems out of sync with the sluggish economy. This gap makes the market weak and prone to corrections with any bad news. Given this risk, buying protective put options on major European indices like the Euro STOXX 50 is a smart move. The cost of this protection is low since the VSTOXX volatility index is at a subdued level of 19. The potential for downside protection is becoming more appealing. Additionally, fiscal policy risks are becoming more apparent, especially with budget concerns arising in Italy and France. This could lead to conflicts between national spending plans and the ECB’s inflation goals in the future. We experienced a similar period of central bank pauses and economic uncertainty in late 2023, which caused uneven market conditions before a clear trend began to emerge. Create your live VT Markets account and start trading now.

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