Germany’s final Consumer Price Index (CPI) for July is 2.0% year-on-year, unchanged from initial reports. This is the same rate as the previous month. The Harmonized Index of Consumer Prices (HICP) also remains steady at 1.8% year-on-year, matching earlier measurements. Previously, it was noted at 2.0%.

Core Annual Inflation Influence

Core annual inflation sticks at 2.7%, which affects the European Central Bank’s (ECB) decisions. However, no rate cuts are expected in September. Germany’s final inflation data for July confirms our expectations. While the headline figure aligns with the ECB’s 2.0% target, the more critical core inflation remains high at 2.7%. This persistent rate is why the ECB will likely maintain its interest rates. This reinforces our belief that the ECB will not cut rates in September. Markets are quickly adjusting their expectations; swaps are now predicting less than a 15% chance of a rate cut before the end of 2025. This marks a significant change from a month ago when the odds were around 40%.

Derivative Traders Strategy

For derivative traders, this situation suggests focusing on range-bound markets and potential spikes in volatility. With the ECB standing by, the upside for indices like the DAX and Euro Stoxx 50 appears limited. Selling call options or setting up bearish call spreads might be attractive strategies. Since the VSTOXX volatility index is near a low of 14, it could be wise to buy cheap protection through long-term call options. This policy dilemma occurs in the context of weak economic growth, which registered only 0.2% for the Eurozone in the second quarter. The current situation resembles late 2023 when the ECB kept rates high to combat stubborn inflation, even with a stagnating economy. That period saw equity markets moving sideways for months. Eyes will now be on the flash Eurozone-wide inflation data for August, expected at the end of this month. A persistent core reading there would almost certainly eliminate any remaining hopes for a rate cut in 2025. We anticipate that options betting on interest rates staying at current levels will become increasingly popular. Create your live VT Markets account and start trading now.

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