# Inflation Trends In Eurozone The Euro remains strong, supported by the European Central Bank’s (ECB) recent minutes, which show no changes to the three main policy rates in October. The Governing Council believes their current approach is stable and is waiting for updated projections in December before making any changes. Inflation is in line with the 2% target, with domestic demand and labor markets remaining robust. Policymakers are aware of potential inflation risks and are debating whether to continue rate cuts or if more easing might be needed by 2026. Markets are almost ignoring the possibility of further rate cuts in 2025, estimating a 40% chance of a cut by the end of 2026. Sentiment data in the Eurozone shows stability, with November’s Economic Sentiment Indicator at 97, which matches expectations. # UK Fiscal Policy Outlook The UK’s Autumn Budget provides more fiscal flexibility. The Office for Budget Responsibility predicts a budget surplus of £21.7 billion by 2029-30. Traders are looking for guidance from the Bank of England regarding policy direction, with a rate cut in December becoming more likely. There’s a clear divide between the European Central Bank and the Bank of England, creating trading opportunities. The ECB is maintaining its policy, describing it as being in a “good place,” while markets are betting on a rate cut from the Bank of England in December. This difference is currently influencing the EUR/GBP exchange rate. Expectations for a Bank of England cut are justified due to recent inflation trends. After UK inflation peaked above 11% in late 2022, it has decreased significantly throughout 2024 and has remained close to the 2% target for most of this year. This improvement allows the Bank of England to consider easing its policy to help the economy. In contrast, the situation in the Eurozone justifies the ECB’s cautious approach. Eurozone inflation remained stubborn throughout 2024, with core inflation showing only recently that it is nearing the 2% target. Consequently, ECB policymakers prefer to wait for more data before indicating any cuts. With upcoming comments from Megan Greene of the Bank of England and the December rate decision, implied volatility in EUR/GBP options is something to monitor closely. For traders unsure of the direction but anticipating a sharp move, buying a short-dated straddle option could be a smart strategy, as it would profit regardless of whether the pair goes significantly up or down after the news. It’s also important to note that overall market volatility, as indicated by the VIX index, has been relatively low compared to the highs of 2022 and 2023. Low implied volatility makes option premiums cheaper, offering a more cost-effective opportunity to buy options in expectation of price swings. This situation presents a favorable setup for buying volatility in the EUR/GBP pair. For those confident that the Bank of England will cut rates next month while the ECB holds steady, taking a long position in EUR/GBP futures contracts could be a direct approach. A Bank of England rate cut would likely weaken the Pound against the Euro, raising the pair above its current level of about 0.8761. This trade bets on the growing interest rate gap between the two central banks. The main risk to this outlook is any unexpected hawkish stance from the Bank of England. If Megan Greene’s comments challenge December rate cut expectations, the Pound could strengthen, causing EUR/GBP to drop to new lows. It’s essential to keep in mind that while the UK’s fiscal situation looks better, any indication of ongoing wage pressures could lead the Bank of England to delay its first rate cut. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now