The European Central Bank (ECB) appears to have concluded its cycle of cutting interest rates, as stated by Primoz Dolenc, Slovenia’s acting central bank governor. According to him, the ECB found its current policy appropriate to achieve its inflation target during the July Governing Council meeting, with no new developments affecting this stance.
Recent reductions in uncertainty have also been a factor, following the European Union securing a trade deal with the United States. This agreement established a 15% tariff on most exports, slightly exceeding earlier forecasts but having a minimal effect on growth and inflation.
ECB Maintains Steady Rates
The ECB maintained steady rates in July after a series of reductions over the past year. It is anticipated to continue this stance with no additional cuts expected in the foreseeable future. The next meeting of the ECB is scheduled for 10 and 11 September. Markets are indicating a status of no further rate cuts this year.
With the European Central Bank signaling an end to rate cuts, we should adjust our interest rate positions. Any strategies betting on further decreases in short-term rates, like long positions in EURIBOR futures, should be reconsidered. The focus now shifts to a stable policy environment, making it a good time to look at trades that profit from range-bound rates.
This view is backed by the latest inflation data released at the end of August 2025, which showed headline inflation holding at 2.1%, slightly above the ECB’s target. More importantly, core inflation remained stubborn at 2.4%, giving policymakers no reason to cut further. Market pricing reflects this, with overnight index swaps now implying less than a 10% chance of another cut this year.
Strengthening Euro and Volatility Reduction
The certainty around ECB policy and the new US trade deal has been supportive for the Euro. We have already seen the EUR/USD exchange rate climb from around 1.08 in early July to trade above 1.11 this past week. We should consider derivative strategies that benefit from a stable or strengthening euro, as the interest rate disadvantage compared to the US is no longer widening.
This reduction in uncertainty has also crushed volatility, with the VSTOXX index falling below 15 for the first time since May 2025. This makes selling options an attractive strategy for generating income, as large, unexpected policy shifts now seem unlikely. Selling strangles on equity indices or bond futures could capitalize on this expected period of calm.
We remember the period after the ECB paused its aggressive hiking cycle back in late 2023; the market remained highly sensitive to individual data points for months. Therefore, while the main policy direction is set, we should expect short-term volatility around upcoming inflation and employment figures. These events will present the primary opportunities for tactical trades in the weeks ahead.
