In July, the headline HICP inflation stayed at the ECB’s target of 2%, instead of dropping to the expected 1.9%. Core inflation met expectations at 2.3%, with energy prices showing less disinflation and food inflation rising to 3.3%, marking an 18-month high. Services inflation dropped to a 40-month low of 3.1%, which aligns with the return to normal wage growth trends. Goods inflation rose to a 16-month high of 0.8%. However, we expect downward pressure from weak US demand and increased competition from China.

ECB Governing Council’s View

The ECB’s Governing Council is likely pleased with July’s data, despite some worries about food inflation. There is no significant upward pressure from global agricultural prices, and services inflation is declining. Inflation is expected to drop below the ECB’s target soon, driven by lower oil prices, a stronger euro, and stabilization in core inflation. This July inflation data strengthens our belief that the European Central Bank will likely cut rates next, rather than raise them. Currently, markets see over a 70% chance of a cut by the October 2025 meeting. This expectation will guide interest rate derivatives in the weeks ahead. We foresee continued downward pressure on European government bond yields. The yield on the German 10-year Bund has already fallen to 2.35%, its lowest since April 2025, and we believe this trend will continue. Positioning in interest rate futures that benefit from lower rates is the main reaction. With services inflation easing and the ECB’s future actions becoming clearer, we expect less market volatility. The Euro Stoxx 50 Volatility Index (VSTOXX) is already near its multi-month low of 14.5, indicating that strategies such as shorting straddles on major European indices could be profitable.

Food Inflation and ECB’s Focus

The rise in food inflation to 3.3% should not overly alarm us. During the 2022-2023 period, the ECB looked past temporary spikes in food and energy prices, focusing instead on core trends. We expect them to continue this approach, seeing current food price pressures as short-lived. The overall environment supports the case for lower inflation and a dovish ECB. Brent crude oil prices have recently dipped below $75 a barrel, which will directly impact future headline inflation figures. A dovish ECB stance compared to other central banks may also gently pressure the euro, further easing financial conditions. Create your live VT Markets account and start trading now.

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