An ECB policymaker emphasizes that while there has been some improvement in inflation, it’s crucial to stay alert. The ECB’s interest rates are now at a neutral level, but inflation risks are still present. The policymaker stated that the ECB will not change its policy due to small changes in the inflation target. Any further rate cuts would need strong justification.

Market Pricing And Economic Indicators

Currently, the market expects only a slight easing of 4 basis points by the end of the year and a total of 11 basis points by the end of 2026, consistent with the ECB’s current position. With the European Central Bank indicating a firm pause, we anticipate that interest rates will remain stable for the foreseeable future. There are noticeable risks of inflation rising, and the monetary policy will stay flexible but inactive unless there is a significant economic shift. This means that small fluctuations from the 2% inflation target won’t lead to more rate cuts. This approach is backed by recent data from late August 2025, showing that Eurozone core inflation remains steady at 2.2%. Even though overall economic activity is slow, with German industrial production showing little growth last quarter, the ongoing inflation allows the ECB to hold off on any action. The market has recognized this, with almost no pricing for future cuts expected by the end of the year.

Strategies For Derivative Traders

For derivative traders, this situation suggests strategies that take advantage of low volatility in the coming weeks. Opportunities can be found in selling short-dated options on Euribor futures, as the central bank’s strong position is likely to keep short-term rates stable within a narrow range. The volatility index for euro-denominated rates has dropped to its lowest point since early 2024, indicating that this trend is already underway. We’ve seen similar situations before, especially during the US Federal Reserve’s extended pause throughout much of 2024, when the market repeatedly anticipated cuts that did not occur. The main risk here is a sudden spike in energy prices as winter approaches, which could raise inflation concerns. Therefore, if you hold short volatility positions, it’s important to size them cautiously to handle any sudden shifts in market sentiment. Create your live VT Markets account and start trading now.

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