The ECB policymaker indicated that GDP growth is slow, which is a problem for competitiveness. This suggests a comfort with the current policy, as the inflation target has been met.
Reaching the inflation target implies stable prices over time. Despite reaching this target, the slow GDP growth highlights challenges in the economy, particularly in maintaining competitiveness.
End Of Rate Hikes
With inflation seemingly under control, we see a clear signal that the European Central Bank’s rate hiking cycle is over. Eurostat’s flash estimate for August 2025 put annual inflation at 1.9%, just below the ECB’s target. This reinforces the view that the next policy move is more likely to be a cut than a hike.
We should anticipate a decline in short-term interest rates and bond yields across the Eurozone. This suggests positioning in derivatives that benefit from lower rates, such as receiving the fixed leg on interest rate swaps or buying futures contracts on German Bunds. Looking back, this is a stark contrast to the hawkish stance the ECB held through much of 2023 and 2024.
The prospect of looser monetary policy should be supportive for European equities, especially as borrowing costs ease for businesses. We could express this view through call options on indices like the Euro Stoxx 50. This comes as a welcome relief after second-quarter 2025 GDP figures showed growth stalling at just 0.1%.
Pressure On Euro
This policy divergence with the US Federal Reserve, which has signaled a more patient approach, is likely to put downward pressure on the EUR/USD exchange rate. Therefore, we should consider strategies that profit from a weaker Euro, such as buying put options on the currency. Interest rate markets are now pricing in a greater than 70% probability of a 25 basis point cut by the December 2025 meeting.
