Peter Kažimír, a member of the European Central Bank (ECB) and the governor of Slovakia’s National Bank, said that the risks to the economy are now more balanced. He also showed caution regarding the low long-term growth prospects. The EUR/USD exchange rate was mostly stable and traded around 1.1735 when this news broke.

European Central Bank and Monetary Policy

The European Central Bank, located in Frankfurt, Germany, sets interest rates and manages monetary policy for the Eurozone. Its main goal is to keep prices stable, aiming for an inflation rate of about 2%. It does this mainly by adjusting interest rates. Higher rates usually make the Euro stronger. The ECB Governing Council makes monetary policy decisions during meetings held eight times a year. In extreme situations, the ECB uses Quantitative Easing (QE). This involves printing Euros to purchase government or corporate bonds, which often weakens the Euro. The opposite of QE is Quantitative Tightening (QT), where bond purchases stop, and no reinvestment occurs in maturing bonds. This usually strengthens the Euro. QE was notably implemented during financial crises and the COVID-19 pandemic. As we near the end of 2025, comments about balanced risks in the outlook are making waves in the market. This is evident in the latest Eurozone inflation figure from November 2025, which stands at 2.8%. This rate is troubling because it’s above the 2% target and complicates the ECB’s plans for the new year. The ECB faces a challenging situation, needing to combat persistent inflation while preventing a recession, especially with a Q3 2025 GDP growth rate of only 0.1%. This suggests that derivatives traders might be underestimating implied volatility on EUR-denominated assets. The sharp market changes during the 2022 rate hike cycle remind us that market sentiment can shift quickly.

Central Bank Decisions and Market Implications

In the coming weeks, a key question is whether the ECB will hint at rate cuts for 2026 or maintain the current deposit rate of 3.75%. Options on the EUR/USD, which is currently around 1.0950, can be set up to gain from either a firm stance or a shift to a softer approach. Historically, the ECB has been careful about easing its policies too soon during the post-pandemic recovery. We should also note the ongoing QB program. QT is subtly tightening financial conditions in the background. Since its peak in mid-2022, the ECB’s balance sheet has decreased by over €1 trillion, which takes liquidity out of the system. This gradual reduction supports the Euro, regardless of official interest rate decisions. Create your live VT Markets account and start trading now.

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