Germany’s final Consumer Price Index (CPI) for July remains at 2.0% year-on-year, matching the preliminary data. This follows a previous rate of 2.0%.
The Harmonised Index of Consumer Prices (HICP) is stable at 1.8% year-on-year, consistent with earlier figures. Previously, this was noted at 2.0%.
Core Annual Inflation Influence
Core annual inflation remains at 2.7%, influencing the European Central Bank’s decisions. Despite this, no rate cuts are anticipated for September.
Germany’s final July inflation numbers confirm what we suspected. While the headline figure is at the European Central Bank’s 2.0% target, the more important core inflation remains stuck at a high 2.7%. This stickiness is the primary reason the ECB will keep interest rates on hold.
This data reaffirms our view that no rate cuts are coming from the ECB in September. We’re seeing markets quickly adjust expectations, with swaps pricing now implying less than a 15% chance of a cut before the end of 2025. This is a significant shift from just a month ago when the odds were closer to 40%.
Derivative Traders Strategy
For derivative traders, this suggests a strategy built around range-bound markets and potential spikes in volatility. With the ECB sidelined, the upside for indices like the DAX and Euro Stoxx 50 seems limited, making selling call options or establishing bearish call spreads an attractive proposition. Given the VSTOXX volatility index is hovering near a low of 14, buying some cheap protection through longer-dated call options could be a prudent hedge.
This policy dilemma is happening against a backdrop of very weak economic growth, which we saw came in at only 0.2% for the Eurozone in the second quarter of this year. The situation feels very similar to what we experienced in late 2023, when the ECB also had to hold rates high to fight stubborn inflation despite a stagnating economy. That period saw equity markets trade sideways for months.
All eyes will now turn to the flash Eurozone-wide inflation data for August, due at the end of this month. Another sticky core reading there would all but eliminate any remaining hope for a rate cut in 2025. We expect options that bet on interest rates remaining at current levels to become more popular.
