Implications for ECB Monetary Policy

The ECB wage tracker shows that wage growth is likely to be lower and more stable in the first half of 2026. In 2024, negotiated wage growth was 4.1%, it’s estimated to drop to 3.8% in 2025, and then further to 2.5% in 2026, not counting one-time payments. For this year, wage growth is expected to be 4.3% in the first half and 3.3% in the second half. This trend suggests that wage pressures will ease over time. This situation gives the ECB more leeway in its monetary policy, especially if worries about consumer prices continue. For full details, you can visit the ECB Wage Tracker website. The latest wage data shows a clear slowdown into 2026, which supports the idea that the European Central Bank can lower interest rates more comfortably. As a result, we should see interest rate futures, like those linked to ESTR, reflecting a more lenient approach to monetary policy over the next year. The market may not fully account for the possibility of earlier or larger rate cuts in 2026.

Impact on Financial Markets

The moderation in wages is significant, especially when combined with the latest economic data from this quarter. The Eurostat flash estimate for August 2025 showed inflation steady at 2.4%. Meanwhile, the Composite PMI data remains just above the 50 mark, indicating little economic growth. This mix of slowing wages and weak growth allows the ECB to focus more on promoting growth rather than worrying about inflation, a shift from their position in 2023. In foreign exchange markets, the growing gap between a more aggressive Federal Reserve and the ECB will likely weaken the Euro. It may be wise to consider strategies for a weaker EUR/USD, like buying put options to target the low levels seen in early 2025. The ECB’s shift toward a more dovish stance, now backed by wage trends, makes long positions in Euro look riskier. For equity derivatives, this outlook is positive for European indices like the Euro Stoxx 50. Lower financing costs for a longer time should boost corporate earnings and valuations. As the ECB’s policy path becomes clearer, we could also see reduced implied volatility, making it a good time to buy call options on these indices. Create your live VT Markets account and start trading now.

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