The European Central Bank (ECB) is likely to keep its current policies unchanged in its next meeting. The deposit rate is at 2.00%, which falls within the neutral range of 1.75% to 2.25%. The ECB plans to stay flexible, focusing on data and reviewing policies at each meeting. Most analysts expect a rate cut in September, but market estimates show only a 44% chance of this occurring by the end of the third quarter.

Future Policy Decisions

Future policy will depend on trade developments and economic data. Conditions are expected to improve, raising hopes for rate cuts in September and December. Support from fiscal policies is anticipated, yet traders only predict a 26 basis point reduction in rates by the end of the year. This cautious viewpoint hints at possible risks for the euro if additional rate cuts occur. The ECB is taking a wait-and-see approach, aligning its policies with general economic trends. Low’s analysis suggests that the next policy meeting will be uneventful, which should keep short-term volatility low. This could be a good chance to sell front-month options on Euro-based assets, as the central bank indicates a desire to wait. The significant moves are likely to come after the summer holidays. We think the market is underestimating the chances of a September rate cut, which currently sits below 50%. Recent data from Eurostat showed that headline inflation unexpectedly rose to 2.6% in May, while core inflation is slowly decreasing, allowing policymakers to stick with their data-driven approach. This gap between market expectations and reality offers an opportunity for derivative positions targeting the third quarter. The economic outlook remains mixed, supporting a cautious approach from officials. Although the HCOB Flash Eurozone Composite PMI reached a 12-month high of 52.2 in May, the manufacturing sector continues to struggle. We should focus on trades that will benefit if economic data weakens more significantly over the next two months, which could prompt the bank to change its stance.

Potential Market Risks

The biggest risk for the euro is a shift in rate expectations, as markets are currently only considering about 26 basis points of cuts this year. Historically, when markets have had to align with a more aggressive easing trend, like that from 2011 to 2014, the currency has weakened significantly. Therefore, we are looking to buy longer-dated put options on the euro to prepare for this possible adjustment in the autumn. Create your live VT Markets account and start trading now.

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