Martins Kazaks from the European Central Bank (ECB) stated that a slight inflation rate below 2% is acceptable. He emphasized the need to avoid hasty decisions. After making eight rate cuts, Kazaks feels that the current policy is in a good place, suggesting that any further adjustments should only happen if absolutely necessary. Kazaks mentioned that inflation close to 2% shows the ECB is achieving its goals. He indicated that there might not be any rate changes in October, but new economic forecasts in December could offer more clarity. If changes are needed, a small rate cut could align with the ECB’s existing plans, similar to the last rate increase in 2023.

Potential Risks

Kazaks also highlighted some risks, including a strong euro, lower Chinese imports, and a new emissions trading system that could affect inflation. He expects inflation to remain around 2%, with minor changes not requiring any policy updates. He shared these thoughts during a meeting of European finance leaders in Copenhagen. Other discussions at the meeting highlighted that future rate cuts would depend on major changes in inflation outlook. The ECB’s cautious strategy may provide stability for European stocks and currency without causing significant fluctuations in the near term. Since the European Central Bank has signaled a clear pause in rate changes, we should rethink any plans based on further interest rate cuts in the near future. The latest Eurostat flash estimate for August 2025 shows inflation at 2.1%, supporting the view that the bank’s goal has been met for now. This indicates that the period of aggressive easing seen in early 2025 is likely over.

Traders In Currency Derivatives

For those trading currency derivatives, the ECB’s current stance should support the euro. A lower chance of more rate cuts eases downside pressure, which may lead to a drop in implied volatility for EUR/USD options. This environment makes it attractive to sell volatility, such as writing short-dated EUR puts. In the interest rate markets, this suggests that futures contracts predicting an October cut are overly optimistic. We now see a slight flattening of the short end of the yield curve as the market adjusts to a “wait-and-see” approach. The attention now turns entirely to the ECB’s fresh projections in December, where even a potential change is viewed as a minor adjustment rather than a new easing cycle. This stable outlook benefits European equity derivatives, likely reducing the high volatility experienced in 2024. With the EURO STOXX 50 index up about 9% this year, the easy gains from monetary easing are likely behind us. Selling index call options against a long portfolio could be a wise way to generate income in a possibly stagnant market. This strategy recalls the pause that followed the final rate hike in September 2023, which allowed markets to adapt to a new reality. The idea of implementing one small cut to reinforce a baseline scenario suggests that policy now focuses on fine-tuning. As a result, we should shift our positions from directional bets based on central bank actions to strategies that benefit from lower volatility. Create your live VT Markets account and start trading now.

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