Insights 
VT 
The European Central Bank released the July 2025 results of its consumer expectations survey. Inflation expectations for the year ahead remain steady at 2.6%, still above the ECB’s 2% target. There is a pause in the decline of these expectations.
Notably, 84.8% of respondents expect prices to rise over the next 12 months. This figure represents the highest percentage since April. Further details are available on the ECB’s website.
Inflation Concerns
The latest consumer survey shows year-ahead inflation expectations are stuck at 2.6%, which is a problem as it remains firmly above the central bank’s 2% target. This finding is particularly concerning because the August 2025 flash inflation estimate was just released, showing a surprise uptick to 2.7% driven by energy and services costs. We see this as a sign that the final push to get inflation back to target is stalling.
This data challenges the market’s view that the European Central Bank would be preparing for rate cuts in early 2026. With the next policy meeting just weeks away in September, we believe the central bank will have to adopt a more aggressive, or hawkish, tone. The odds of rates staying higher for longer have now increased substantially.
In response, we are looking at interest rate futures tied to EURIBOR, which now seem underpriced for a hawkish hold. Traders might consider paying fixed on short-term interest rate swaps or buying puts on bond futures to protect against a potential rise in yields. These positions would benefit if the market is forced to push back its timeline for rate cuts.
Market Strategies and Volatility
This uncertainty should also increase volatility, something we saw happen frequently back in the 2022-2023 period whenever inflation data surprised to the upside. Consequently, strategies that profit from larger price swings, such as buying straddles on the Euro Stoxx 50 Volatility Index (VSTOXX), could prove effective. A more hawkish ECB would likely strengthen the Euro, so call options on the EUR/USD currency pair could also be considered.
This view is reinforced by the strong labor market, with unemployment across the Eurozone recently reported at a multi-decade low of 6.3%. This tightness continues to fuel wage growth and services inflation, giving the central bank little room to ease policy. Any trades that are reliant on a swift return to a low-rate environment appear increasingly risky.
