Pierre Wunsch, an ECB policymaker and head of Belgium’s central bank, said on Wednesday during the European trading session that the ECB will need to act at some point. He said “we are at the beginning of an inflation problem”.
The comments had no immediate effect on the Euro. At the time of writing, EUR/USD was down 0.15% near 1.1590, as the US Dollar continued to outperform.
Inflation Pressures Build In The Eurozone
We remember hearing warnings like those from Pierre Wunsch back in 2025 about inflation just beginning. Now, with the latest Eurozone HICP data for April showing inflation holding firm at 2.8%, it is clear that problem is well underway. This persistence has forced the European Central Bank’s hand over the past year.
The ECB has already moved its main deposit rate to 0.75%, but the market is pricing in more action to cool the economy. Money markets are currently anticipating at least two more 25-basis-point hikes before the end of this year. Traders should therefore look at options on Euribor futures to position for a central bank that may act more aggressively than what is currently expected.
While we see the ECB continuing its tightening policy, the US Federal Reserve appears to be signaling a pause after bringing its own rates up to 3.50%. This growing divergence in policy paths suggests potential strength for the Euro against the US Dollar from its current level around 1.0850. Call options on EUR/USD could be an effective way to gain exposure to this potential upside over the next several weeks.
Volatility Remains A Key Risk Factor
The uncertainty surrounding the pace of ECB rate hikes is keeping implied volatility elevated. The Euro STOXX 50 Volatility Index (VSTOXX) has been hovering around 22, which is significantly above its long-term average of 18. This environment suggests buying options to hedge portfolios may be expensive but necessary, as sharp market moves can be expected on new inflation data or central bank statements.
