Nagel believes that keeping rates steady is appropriate for the current economic climate, given the uncertainty and improved forecasts.
by VT Markets
/
Jul 25, 2025
The European Central Bank (ECB) is likely to keep interest rates stable after making eight cuts. The economic outlook has shown a bit of improvement since June.
This cautious approach seems wise given the current uncertainties. Market predictions indicate a 50/50 chance of another rate cut by December.
Policymaker Comments Indicate a Pause
We interpret the comments from policymakers as a clear sign that the cycle of rate cuts is likely paused for now. This pause means that traders expecting significant rate cuts may need to rethink their strategies. The focus has shifted from how many more cuts there will be to how long rates will stay the same.
Recent data supports this stance. Eurozone inflation unexpectedly rose to 2.6% in May, up from 2.4% in April. Additionally, strong wage growth of 4.7% in the first quarter gives the central bank a solid reason to wait. This persistent inflation makes another quick cut unlikely.
Given varying expectations for moves by the end of the year, we expect increased volatility in euro-denominated assets. Traders may want to consider buying straddles or strangles on indexes like the Euro Stoxx 50. These strategies can benefit from significant market moves in either direction.
Adjusting Positions in Interest Rate Swaps
We recommend adjusting positions in interest rate swaps to reflect a longer period of higher rates than previously thought. The forward curve may still indicate a higher chance of rate cuts than what Mr. Nagel has suggested, and we believe it’s mispriced. Taking fixed positions on swaps with a 6-month to 1-year term could be an effective way to prepare for this pause in policy.
Historically, policy pauses during uncertain economic times have led to unstable markets until clearer trends emerge. With the ECB appearing more focused on inflation compared to the US Federal Reserve, we see potential for the Euro to gain strength. Using call options on the EUR/USD currency pair is a cost-effective way to bet on this policy divergence.
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by VT Markets
Jul 25, 2025
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