ECB President Christine Lagarde said the Governing Council\u2019s decision at the July meeting to leave key interest rates unchanged was unanimous, though some members raised whether a rate hike should be considered. She said policy was positioned adequately to wait and that the central bank would avoid offering any forward guidance ahead of the next decision.<\/p>\n\n
Lagarde said the ECB will have a long list of fresh data before the September meeting. She added that policymakers are particularly attentive to the risk of second-round effects, while saying they are not seeing such effects yet. On wages, she said a gradual decline is still under way.<\/p>\n\n
We must prepare for increased volatility in Euro Short-Term Rate (\u20acSTR) derivatives as the ECB maintains its strict data-dependent stance without forward guidance. The revelation that some policymakers floated a rate hike suggests that the path to further easing is much more contested than the market originally priced in. We recommend derivative traders hedge against hawkish risks by utilizing out-of-the-money payer options on Euribor.<\/p>\n\n
Current Eurozone inflation is hovering near the 2.0% target, down from the double-digit peaks of the recent inflation crisis, while wage growth has moderated to around 3.2%. However, because the central bank remains highly sensitive to any signs of second-round effects, even a minor tick upward in upcoming wage or service inflation data will trigger sharp repricing. We should exploit this sensitivity by positioning for wider-than-expected yield spreads between German Bunds and Southern European bonds.<\/p>\n\n
With a massive wave of economic indicators scheduled before the September meeting, short-term rate futures will react aggressively to every single data release. We advise trading the range on Euro-denominated interest rate swaps rather than committing to a directional bias. Entering straddles on short-dated options will allow us to profit from the inevitable swings in market sentiment over the coming weeks.<\/p>\n\n\n\n