The European Central Bank’s Consumer Expectations Survey reveals a drop in inflation expectations for the coming year. It’s now at 2.6%, down from 2.8%. However, expectations for inflation three years from now remain steady at 2.4%, and five years from now at 2.1%. The survey suggests that inflation expectations are stable, which is good news.

Inflation Expectations Analysis

The decline in one-year inflation expectations to 2.6% is encouraging. It shows that price pressures are easing. This supports our belief that the European Central Bank won’t feel the need to make aggressive changes soon. While this data is positive, it isn’t strong enough to alter their current policy before the September meeting. This trend is evident in other economic data as well. The latest Eurozone flash HICP inflation for July 2025 is 2.4%. This remains above the ECB’s 2.0% target, which is why they kept the main deposit rate at 3.50% earlier this month. We expect this to create a steady environment through August. With major policy changes unlikely, we see a chance to sell volatility in the options market. The VSTOXX index, which measures Euro Stoxx 50 volatility, is now at a low 15. This environment makes it a good time to use strategies like selling short-dated strangles on major European indices.

Investment Strategy And Hedging

In interest rate derivatives, we are preparing for a period of stability. The market has factored out the possibility of an August rate cut, and the German 10-year Bund yield remains strong at around 2.3%. Therefore, we are focusing on short-term interest rate swaps (EONIA swaps) that will be profitable if the ECB stays steady as we expect. However, we should remember the unexpected rise in energy prices in late 2024, which briefly raised concerns about inflation rising again. For this reason, we are keeping some inexpensive, out-of-the-money call options on inflation swaps as a hedge. This safeguards our core investments against any surprise economic changes during the typically quieter summer trading period. Create your live VT Markets account and start trading now.

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