The Euro-Area economy was strong earlier this year, but growth slowed down in the second quarter. Experts predict that this slowdown will continue into the third quarter. Even with a trade agreement with the US, uncertainty remains, as it doesn’t fully address concerns. The market expects only a small reduction of 11 basis points in rates by the end of the year, and there’s less than a 50% chance of that happening.

Data Shows Contraction

The European Central Bank (ECB) is acknowledging recent data trends. Eurostat reported last month that Euro-Area GDP growth was only 0.1% in the second quarter of 2025. The latest flash manufacturing PMI for August has dropped to 49.5, signaling a contraction. This aligns with expectations for a continued slowdown in the third quarter. The ECB is hesitant to indicate a clear easing path due to persistent inflation. Although inflation has significantly decreased from previous highs, the Harmonised Index of Consumer Prices (HICP) for July 2025 was still at 2.4%, above the 2% target. The central bank is cautious after a tough hiking cycle from 2023 to 2024 and does not want to risk changing its policies too soon. This scenario suggests a period of stable markets with low confidence, making it a good time to sell volatility. With the market expecting minimal action from the ECB, implied volatility for Euro Stoxx 50 options may be overestimated. Traders might benefit from strategies that take advantage of time decay and a lack of drastic market movements in the weeks ahead. For those anticipating worse economic data that could push the ECB to act, positioning for lower interest rates could be wise. The current market pricing of just 11 basis points in cuts by year-end seems low if we slip into a technical recession. Using Euribor futures or receiver interest rate swaps allows for a direct bet that the ECB will need to provide more stimulus than expected.

Safe-Haven Assets Rise

The safest way to express this slowdown might be in the government bond market. As growth weakens, demand for safe-haven assets like German Bunds should rise, increasing their prices and lowering yields. Buying call options on Bund futures provides a low-risk approach to benefit from this shift towards safety in the coming weeks. Create your live VT Markets account and start trading now.

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