Christine Lagarde, the President of the European Central Bank (ECB), talked about the decision to keep key interest rates steady after the meeting in October. She highlighted worries about slowing labour demand and high household savings. The ECB, based in Frankfurt, Germany, is the Eurozone’s central bank. It sets interest rates and manages monetary policy for the region, aiming to keep prices stable with an inflation target of around 2%. To achieve this, the ECB adjusts interest rates and makes decisions eight times a year through the Governing Council.

Quantitative Easing in Extreme Situations

In extreme situations, the ECB can use Quantitative Easing (QE). This means printing Euros to buy assets, which usually weakens the Euro. QE was used during the Great Financial Crisis and the COVID pandemic. On the other hand, Quantitative Tightening (QT) involves stopping bond purchases and not reinvesting in maturing bonds, often strengthening the Euro. Lagarde mentioned that although the global situation is challenging, domestic spending could boost the economy, while ongoing government spending may encourage investment. However, a decline in manufacturing orders due to tariffs and weak external demand is a concern. The European Central Bank is indicating it will keep interest rates stable for now. This decision reflects Eurozone inflation, which fell to 2.5% in September 2025 but is still above the 2% target. This suggests the end of the aggressive interest rate hikes that finished in 2024. The decline in manufacturing is worrisome. The latest PMI figures for October showed a contraction of 45.8, affected by ongoing trade tariffs. Labour demand is also decreasing, and the unemployment rate has risen to 6.7% in the bloc. These factors reduce the urgency for more rate hikes and support the idea of future cuts.

Expectations for Interest Rate Cuts

However, we should not expect immediate rate cuts. Unusually high household savings from post-pandemic times are still supporting consumer spending and services. This domestic spending is crucial in preventing a wider recession and keeping the ECB careful about sparking inflation. For traders, attention is shifting from predicting rate hikes to timing the first rate cut in 2026. Options on EURIBOR futures show that the market is pricing in at least a 50% chance of a cut by the second quarter of next year. The strategy now is to prepare for this shift, even if the central bank hasn’t indicated it yet. This economic divide, where a struggling external market contrasts with strong consumer resilience, also opens up opportunities in currency and equity options. A weaker Euro against the dollar seems likely, making long-dated put options on the EUR/USD appealing. In the stock market, we expect consumer-focused stocks to perform better than the overall industrial-heavy indices. Create your live VT Markets account and start trading now.

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