The European Central Bank (ECB) has decided to keep its key interest rates unchanged during its December meeting. The current rates are as follows: the main refinancing operations at 2.15%, the marginal lending facility at 2.4%, and the deposit facility at 2%. Predictions show that headline inflation will average 2.1% in 2025, stabilizing around the 2% target in the medium term. Inflation excluding energy and food is expected to reach 2.4% in 2025. Economic growth estimates have been raised to 1.4% for 2025-2028, driven by domestic demand.

Data Dependent Approach

The ECB is using a data-dependent approach to guide its monetary policy, meaning there is no fixed path for interest rate changes. The Eurosystem’s Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP) are gradually winding down. As a result, the Euro mostly held its value against the USD following the ECB’s announcements. The Euro showed strength against the Australian Dollar, with slight changes against other currencies. Expectations about the ECB’s future policies remain amidst economic stability and manageable inflation in the Eurozone. The ECB aims to align inflation with its target while supporting macroeconomic growth. Inflation in the Eurozone is still above the target. Policymakers may adjust forecasts for GDP and the Harmonized Index of Consumer Prices (HICP). Economic indicators, such as GDP growth and trade balance, are vital for assessing the Euro’s value and will influence ECB policy decisions. The European Central Bank is keeping interest rates stable but isn’t providing clear guidance for the future. Their choice to maintain the main refinancing rate at 2.15% was anticipated, yet the absence of direction leaves us uncertain as we move into the new year. This data-dependent approach implies that upcoming economic reports could lead to significant market shifts. Inflation remains the primary concern. The ECB projects it will stay near the 2% target for the next few years. However, the latest flash estimate for December 2025 shows that core inflation, which ignores volatile elements, is still at 2.5%. This persistence in price pressure supports the ECB’s decision to wait, making a rate cut in early 2026 unlikely.

Outlook on Growth

The growth outlook is unexpectedly positive, with estimates raised to 1.4% for 2025. This is backed by the latest S&P Global Eurozone Composite PMI data, which registered 50.7 in December, indicating a slight yet steady expansion for the twelfth consecutive month. This resilience, mainly driven by domestic demand and investments in AI, gives the ECB leeway to maintain strict policies. Wage growth also needs close monitoring, as it was pointed out as a critical factor. The ECB’s data for the third quarter of 2025 showed negotiated wage growth at 4.1%. Although this is declining from its peak earlier in 2025, it remains uncomfortably high. This persistent wage pressure is a key reason to avoid expecting quick rate cuts. Considering this uncertainty, making strong directional bets on the Euro seems risky in the upcoming weeks. The EUR/USD has been trading sideways around the 1.1740 level, and the ECB’s neutral stance offers no reason for a breakout. Implied volatility in one-month EUR/USD options has increased to 7.2%, reflecting market jitters as year-end approaches. This environment suggests that options strategies aiming to profit from range-bound trading or increased volatility are more suitable. Selling out-of-the-money strangles could be a way to earn premiums if the EUR/USD stays within its recent support and resistance levels. Alternatively, buying straddles before the January inflation data could be beneficial if the numbers surprise the market. For those trading interest rates, the message is clear: the “higher for longer” narrative is becoming more established for the Eurozone. Looking at Euribor futures, market expectations for the first rate cut have been pushed back, with a full 25 basis point cut not anticipated until late 2026. This contrasts with expectations from a few months ago for 2025 and suggests that aiming for a flat yield curve could be wise. Create your live VT Markets account and start trading now.

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