The President of the European Central Bank (ECB), Christine Lagarde, announced that the ECB will keep key interest rates unchanged during the October policy meeting. She highlighted various economic issues, such as the differing demand inside and outside Europe, the effects of tariffs on manufacturing, and unusually high household savings.

The ECB’s Rate Decision

The ECB decided to keep the main refinancing operations rate at 2.15%, the lending facility rate at 2.4%, and the deposit rate at 2%. They emphasized the strength of the Eurozone economy, despite global challenges, pointing out a strong labor market and previous rate cuts. However, the future remains uncertain due to ongoing trade disputes and geopolitical issues. After the announcement, the EUR/USD exchange rate fell 0.4% to 1.1555, indicating that the Euro weakened against the US Dollar and other currencies. Although inflation is steady around the 2% target, the ECB will base future monetary policy on economic data. The market does not expect any rate cuts until March next year. The ECB has not committed to a specific rate plan as their APP and PEPP portfolios are decreasing. The ECB’s interest rate decisions impact inflation, which in turn affects the Euro’s value. Generally, quantitative easing (increasing money supply) weakens the Euro, while quantitative tightening (reducing money supply) strengthens it. The ECB is holding rates steady, but there’s a lot of uncertainty ahead. This could lead to increased market volatility, especially with key inflation and growth reports due in November and December. Traders may find it beneficial to use strategies that profit from price fluctuations, like buying straddles on the Euro Stoxx 50 index, since the VSTOXX volatility measure is lower than earlier this year.

Impact on Currency and Market Strategies

The decline in the EUR/USD rate to 1.1555 shows a clear bearish trend. The interest rate difference drives this change, with the US Federal Reserve’s policy rate at 3.0%, noticeably higher than the ECB’s 2.0% deposit rate. We can expect this downward pressure to persist in the coming weeks, suggesting strategies like selling out-of-the-money call options on the EUR/USD pair to profit from sideways or downward movements may be effective. In the European economy, there is a clear divide: strong consumer spending contrasts with a manufacturing sector struggling due to trade tariffs. Latest data confirms this, with the Eurozone Services PMI for October at a solid 53.5, while the Manufacturing PMI is just 50.1. This split indicates that traders might benefit from focusing on options related to individual sectors, particularly favoring consumer discretionary companies that are less affected by global trade issues over industrial exporters. Although longer-term inflation expectations are close to the 2% target, mixed signals cloud the immediate outlook. Wage growth, a key inflation factor, has slowed to 3.5% annually in the third quarter of 2025, down from 4.5% a year earlier. This trend supports keeping rates steady. A similar situation occurred in late 2023, where reduced wage growth allowed the central bank to pause its rate hikes. Traders using interest rate futures should be cautious about expecting aggressive policy changes soon. Create your live VT Markets account and start trading now.

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