Insights 
VT 
German states released their inflation data for July, with varying results. Bavaria reported a year-on-year increase of 1.9%, up from 1.8% the previous period.
In North Rhine Westphalia, the Consumer Price Index (CPI) remained constant at 1.8% year-on-year. Saxony experienced a decrease, with the CPI falling to 1.9% from 2.2% previously, while Baden Wuerttemberg’s CPI remained unchanged at 2.3%.
National Inflation Rate Projection
These mixed results suggest the national inflation rate is likely to be around 1.9% or 2.0%. The core inflation figure, which was 2.7% in June, is considered the most critical aspect and is expected to remain stable in July.
The European Central Bank (ECB) continues to observe these figures closely as they navigate economic conditions through the summer. The consistent core figure underscores ongoing economic challenges within the eurozone.
We’re seeing mixed inflation signals from the German states today. This likely means the national number will hover near the European Central Bank’s 2% target, but that isn’t the whole story. The real issue is core inflation, which has been stubbornly sticky above 2.5% all year, keeping policymakers on edge.
Monetary Policy Outlook
This data complicates the path for the ECB, which has held its main rate at 2.75% since the spring. Markets had been pricing in at least one more rate cut before year-end, a view that now looks less certain. With the latest Eurozone core HICP estimate for June coming in hot at 2.8%, the bank has little room to ease policy.
For derivatives traders, this persistent uncertainty is likely to keep volatility elevated in the coming weeks. The VSTOXX index, Europe’s main fear gauge, has been creeping up from its lows and is now sitting around 18. This environment can be favorable for strategies that profit from time decay and sideways markets, such as selling short-dated options strangles on the DAX index.
We should also re-evaluate positions tied to short-term interest rates. Looking at Euribor futures, the market will likely push back expectations for a rate cut from September into late 2025 or even early 2026. This is a situation reminiscent of 2023, when bets against central bank pivots paid off handsomely for traders who trusted the inflation data.
Given the risk that markets are underestimating the ECB’s resolve, holding some downside protection makes sense. Buying out-of-the-money puts on the Euro Stoxx 50 index is more expensive now, but it offers a hedge against a hawkish surprise from policymakers. This could be a prudent move before the official Eurozone inflation figures are released next week.
