ECB’s Kazaks has said there’s currently no reason to cut interest rates. This view is shared by many on the Governing Council. This indicates that the ECB is halting rate cuts for now. Some members, like ECB’s Schnabel, are even thinking about possible rate increases.

End Of Interest Rate Cuts

We believe the long period of interest rate cuts has come to an end. European policymakers are currently not interested in further easing. The focus is now shifting toward discussing potential rate hikes. This change is supported by recent data showing Eurozone inflation remains high. In August, inflation rose back to 2.4%, well above the central bank’s 2% goal. This reinforces the conclusion that the easing cycle, which included three cuts earlier in 2025, has ended. The market is now adjusting to this new reality. The bond market is responding, as seen by the German 2-year yield, which rose 15 basis points just last week. This suggests that expectations for another rate cut this quarter are fading fast. Traders who anticipated lower rates are likely feeling the heat to change their positions.

Market Reactions And Strategies

For those dealing with interest rate derivatives, paying fixed rates on interest rate swaps is becoming a better option. Now is also a good time to rethink any short positions on short-term interest rate futures, like those linked to Euribor. It seems that rates have stabilized for the near future. In the currency market, this shift towards a more hawkish stance is boosting the Euro, which has strengthened against the US dollar, surpassing the 1.10 mark. We should think about buying call options on the EUR/USD to take advantage of further potential gains. This strategy lets us benefit as the interest rate difference moves in favor of the Euro. We can also expect increased volatility as the market processes this policy shift. This environment makes buying options, such as straddles or strangles on major European stock indices, a smart move. These strategies can profit from significant market moves in either direction without needing to predict which way it will go. This situation reminds us of the policy pause in late 2023, when the market underestimated the central bank’s resolve to combat inflation. Those who anticipated a quick return to rate cuts were mistaken. We should learn from that time and pay attention to the clear message from policymakers today. Create your live VT Markets account and start trading now.

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