The European Central Bank (ECB) is planning a gentle support for its policies. Markets expect one last rate cut of 25 basis points before the year ends, likely in December. ECB policymaker Wunsch has shown no concerns about current interest rate expectations. These market forecasts indicate a cautious approach to changing monetary policy soon. Wunsch’s comments suggest he is comfortable with how rates are priced now. This means the central bank is not looking to disrupt credit conditions unnecessarily. From our viewpoint, this acceptance of market expectations allows implied volatilities to remain stable, possibly decreasing a bit if encouraging data confirms the expected rate trend. The expected 25 basis point cut has been gradually integrated into futures curves and swaps, particularly for December. This has narrowed rate differences against certain counterparts. Hence, we might see moderate flattening of short-end curves if upcoming economic data stays weak but not worrying. Any changes in wage pressures or inflation could affect the timeline, especially if price trends start to strengthen. As the policy tightens less, there may be increased demand for short-dated euro options, especially at or just above the money level. Front-end risk reversals could slightly shift as traders assess the chances of earlier or later easing. This situation may also increase activity in calendar spreads as traders seek to benefit from or hedge against timing expectations. We note that implied rates for shorter terms remain steady, indicating some uncertainty or hedging activities. However, unless forward guidance improves significantly, the gamma in shorter maturities may slowly decline with lower realized volatility. There’s an opportunity here for selective premium selling, provided there is adequate protection in areas where skew remains slightly high. The cautious stance from policymakers, along with still-strong macro data in parts of the eurozone, reduces the likelihood of urgency returning to the curve without any significant shock. Instead of making aggressive moves, we find it wiser to keep flexible downside hedges and closely watch ECB comments for any signs of concern about market pricing or inflation. In the coming weeks, option structures sensitive to policy directions beyond December may gain more attention, especially if forward guidance hints at a pause or conditional approaches. Traders focused on rate or currency path dependency may find a short but valuable window to shape their positions with an eye on volatility repricing timing.

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