The European Central Bank’s (ECB) policymaker recently spoke about current interest rates. They mentioned that inflation has decreased and is no longer a significant concern.

Inflation And Policy Changes

They highlighted that the policy can be adjusted if necessary, even though tariff uncertainty continues. The policymaker indicated that interest rate cuts are not needed right now. For rates to drop in the future, there would need to be major negative changes. Based on these comments, we believe that the ECB will keep its policy steady for the foreseeable future. The signal is clear: it will be tough to cut rates further. This means we should rethink positions that expect lower interest rates in the upcoming months. Recent data supports this steady outlook. The latest Eurozone Harmonised Index of Consumer Prices (HICP) for July 2025 was 2.1%, which is close to the 2% target. This gives policymakers no reason to change their stance, especially since the unemployment rate is stable at 6.4%. Thus, we view the current interest rate as the baseline for the rest of the year.

Interest Rate Contracts And Positioning

For those trading in interest rate contracts, bets on rate cuts for the fourth quarter of 2025 seem overpriced. We should plan for short-term rates, like Euribor, to stay stable until the end of the year. Selling futures contracts that expect rate cuts is a smart strategy. This policy stability should also support the euro, especially against currencies like the dollar, which has weaker economic data. Implied volatility in the EUR/USD pair has dropped to its lowest since early 2024, indicating that the market is pricing in this calm period. Selling out-of-the-money puts on the euro could be a good way to take advantage of this lower risk. We’ve seen a similar trend before, like during the Federal Reserve’s long pause in 2023 and 2024. At that time, the market focused less on central bank guidance and more on individual data points, causing significant short-term movements. We expect this pattern to emerge in European markets over the next few weeks. However, we must keep in mind that tariff uncertainty is still unresolved. While it’s a secondary issue for now, any unexpected negative news on trade could push policymakers to adapt more quickly. It’s wise to include some level of portfolio protection against sudden economic shocks. Create your live VT Markets account and start trading now.

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