The European Central Bank (ECB) is keeping interest rates steady for now. This decision fits the current economic situation, as earlier rate cuts are still influencing the economy. The ECB thinks that the time for easy rate changes has ended. Instead, their attention is shifting towards economic conditions and trade, especially with the US. The euro’s value is close to average, and the ECB is closely watching its changes.

Potential for Economic Growth

There is untapped potential for economic growth, which affects the decision on interest rate changes. The chance of another rate increase is 50 percent, as current monetary policies and fiscal measures seem to support growth instead of decline. Comments from Kazāks suggest that the derivatives market might be underestimating the risk of higher rates lasting longer. It’s wise to shift focus from expecting aggressive rate cuts. Strategies that profit in a stable or slightly hawkish interest rate environment could be beneficial in the upcoming weeks. Recent data backs this careful approach. Eurozone inflation unexpectedly rose to 2.6% in May 2024, with persistent inflation in services being a major worry for policymakers. We believe this situation justifies keeping rates as they are, as inflation risks seem more significant now than before. Moreover, economic activity appears to be improving. The HCOB Flash Eurozone Composite PMI Output Index reached a 12-month high of 52.3, indicating a stronger economic bloc. This improvement lessens the need for more monetary support and suggests there is still potential for growth.

Implications for Traders

For traders, betting on quick rate cuts is becoming a riskier move. It may be smart to sell volatility in interest rate futures like the EURIBOR, since a stable policy means less market movement. Money markets have already adjusted, now predicting fewer than two full cuts of 25 basis points by the year’s end. The central bank is also paying attention to wage growth, which rose to 4.7% in the first quarter. These domestic inflation pressures are why officials are cautious about promising rate cuts. The chance of the next move being a hike, rather than a cut, is a realistic scenario to prepare for. Historically, the central bank has made mistakes by acting too quickly, like in 2011 when they raised rates too soon. They are keen not to repeat that error, which supports the current strategy of waiting and evaluating data. This historical insight reinforces our belief that traders should brace for a long pause. Create your live VT Markets account and start trading now.

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