Edward Scicluna, the Governor of the Central Bank of Malta and a policymaker at the ECB, has suggested that the European Central Bank (ECB) should not rush into cutting interest rates any further. The effects of increased trade tariffs from the Trump administration on prices are still unclear. It’s uncertain if these tariffs will lead to rising inflation or push prices down. As of the latest report, the EUR/USD exchange rate increased by 0.42%, trading around 1.1695. The European Central Bank, located in Frankfurt, Germany, manages monetary policy and sets interest rates to keep prices stable in the Eurozone, aiming for an inflation rate close to 2%.

Quantitative Easing and Tightening

In tough financial times, the ECB may use Quantitative Easing (QE), which involves printing more Euros to buy assets, typically resulting in a weaker Euro. On the other hand, Quantitative Tightening (QT) occurs after QE, stopping bond purchases and reinvestments, which usually strengthens the Euro. These actions are strategic responses to different economic conditions and have been significant during major global events like the Great Financial Crisis and the COVID-19 pandemic. Scicluna’s recent remarks indicate that we shouldn’t expect another rate cut soon. The latest estimate from Eurostat for September 2025 shows inflation at 2.4%, still higher than the ECB’s 2% target. This makes the ECB’s 25 basis point cut in September 2025 likely the last for a while. The main reason for this caution is the uncertainty around new US trade tariffs. Last week, the proposed 15% tariff on EU car imports raised questions about whether it will increase prices, leading to inflation, or dampen demand. This uncertainty is reflected in the market, so we need to tread carefully.

Impact on Derivatives Trading

For those trading derivatives, we can expect ongoing volatility in Euro-related assets. The VSTOXX index, a key measure of Eurozone equity volatility, has surged over 25% in the past month, reaching levels not seen since the energy crisis of late 2022. This suggests that buying options like straddles or strangles on the EUR/USD could be a smart strategy to navigate the upcoming uncertainty, as opposed to making straightforward bets in one direction. While the ECB is hinting at a pause, we also see indications of a more dovish Federal Reserve, which supports the EUR/USD around the 1.1700 level. Historically, the divergence in rates between the Fed and ECB has been a key factor driving currency movements in 2023 and 2024, and that trend appears to be resurfacing. Therefore, long positions in the Euro may be safeguarded, but the potential for gains could be limited by ongoing trade tensions until there’s more clarity. Create your live VT Markets account and start trading now.

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