ECB policymaker Kazimir has said there’s no urgent need for action right now because nothing has changed. He doesn’t see a risk of ongoing inflation falling below target and thinks risks aren’t moving downward. For Kazimir to take action, he needs to see clear signs that the labor market is weakening. Although the US-EU trade deal may reduce uncertainty, its effect on inflation is still unclear.

Easing Cycle Complete

Kazimir believes the easing cycle is over, but he might consider one last rate cut in December if negative data comes up. The market currently thinks there’s a 65% chance of a rate cut in December. With the trade deal expected to lower uncertainty, and given that ECB easing measures and fiscal expansion are underway, the ECB may be done with rate cuts for now. We think the market is misunderstanding the European Central Bank’s plans for the rest of the year. Kazimir’s comments suggest a high threshold for further rate cuts, indicating that the 65% likelihood of a December move is likely too optimistic. This gap between what officials are saying and what the market thinks offers a clear opportunity.

Market’s Misreading Of ECB Intentions

This view is backed by the latest economic figures, which don’t suggest the economy needs emergency support. The Eurozone’s unemployment rate stayed at a low 6.4% in July, showing no signs of the “unraveling” he mentioned as a requirement for action. Additionally, August’s initial inflation rate was 2.5%, well above the central bank’s target. With this information, we believe traders should expect the market to lower the odds of a December rate cut in the upcoming weeks. A straightforward approach is to sell December Euribor futures or enter short-term interest rate swaps to lock in a fixed rate. These strategies will profit if expectations for short-term rates increase as the chance of a cut decreases. We’ve seen this before, where the market gets ahead of itself in predicting central bank actions that policymakers aren’t ready for yet. For example, in late 2023, markets rapidly anticipated rate cuts in 2024, which were later delayed, leading to a sharp increase in short-term yields. A similar adjustment could happen now if the data stays strong. This perspective could also affect the euro; a less dovish central bank tends to strengthen the currency. Traders might consider buying short-dated EUR/USD call options, offering a limited-risk way to capitalize on a potential rally in the euro if the central bank signals it’s done with rate cuts for now. Create your live VT Markets account and start trading now.

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