The European Central Bank (ECB) policymaker, Mario Centeno, has talked about future inflation predictions. He believes that by 2028, inflation will drop below 2%, which highlights concerns about continued low inflation rates. Centeno indicated that the next move in monetary policy is likely to be a cut. This aligns with his usual soft approach to inflation and monetary policy.

Inflation Worries and Market Reactions

Recent statements from Centeno reveal growing concerns that inflation might remain under the 2% target for a while, with forecasts for 2028 reflecting this worry. The final August HICP inflation figure for the Eurozone came in at a mild 1.8%, strengthening the idea that a policy cut is coming. This creates a clear focus for derivative traders in the upcoming weeks. The market seems a bit relaxed, even though these warnings come from a known dove. December 2025 Euribor futures are currently showing only about a 40% chance of a 25-basis point cut by year-end. This lack of urgency might present an opportunity if future economic data weakens. Traders could think about buying December Euribor or March 2026 futures to prepare for a rate cut that the market hasn’t fully acknowledged. German 2-year yields have stayed around 2.45% over the past week, showing little immediate response to these comments. Another strategy is to receive fixed in short-term interest rate swaps to reflect the expectation of lower rates.

Market Strategies and Implications

This dovish approach puts downward pressure on the Euro, especially since the US Federal Reserve has paused its actions. Implied volatility on EUR/USD 3-month options has dropped to just 5.5%, a level we haven’t seen since before the energy crisis in 2021. Purchasing inexpensive EUR/USD put options or put spreads provides a low-cost way to bet on a potential drop to the 1.05 level. We should recall that the ECB started its cutting cycle in June 2024, signaling its plans well ahead of time. The current risk is that the market might be right in dismissing these singular dovish voices, especially if upcoming wage or service sector data shows unexpected strength. Thus, using options to manage risk might be wiser than making direct futures positions. Create your live VT Markets account and start trading now.

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