JP Morgan now predicts that the European Central Bank (ECB) will implement its next rate cut in December, shifting from an earlier October forecast. This follows the ECB’s recent decision to keep key interest rates steady during their September meeting.
The ECB has adjusted inflation expectations, raising forecasts for 2025 and 2026 while reducing expectations for 2027. During a press conference, ECB’s Lagarde suggested that current obstacles to economic growth may decrease next year. Although the topic of rate cuts remains under discussion within the ECB, in-depth talks are anticipated to occur in December.
Market Reactions To ECB Announcements
Elsewhere, currency markets reacted as the Euro weakened following this news. Additionally, a potential minimum tariff on EU goods by the US government and movements in EURUSD were notable. Meanwhile, in Japan, export restrictions to certain entities in China have been announced as part of sanctions.
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Given the European Central Bank’s decision to hold rates steady, we see the next potential rate cut pushed back to December. This hawkish pause was reinforced by ECB policymakers who now seem convinced no more cuts are needed to hit their 2% inflation target. This suggests the Euro may find some support in the short-term as yield differentials with other currencies will not widen as quickly as we previously anticipated.
Global Economic Concerns Impacting The Euro
With the ECB’s path clearer until the end of the year, short-term volatility in the Euro may decrease. This could present an opportunity for us to sell options that expire in October or November to collect premium, betting that the currency will trade within a range. The market’s focus has now shifted from *if* the ECB will cut to the specific timing in December, reducing immediate uncertainty.
However, a much larger risk is overshadowing monetary policy, with reports that the US is considering a minimum tariff of 15-20% on all EU goods. We remember the market turmoil during the 2018-2019 trade disputes, and with total US-EU trade exceeding €1.2 trillion last year, the economic impact could be severe. This threat creates a significant downward pressure on the Euro that could easily override the ECB’s current stance.
Therefore, we believe it is wise to buy protection against a potential sharp fall in the EUR/USD exchange rate. Purchasing put options with expirations in late 2025 or early 2026 would be a prudent hedge against this major geopolitical risk. We’ve already seen 3-month implied volatility on EUR/USD options climb from around 6% to over 7.5% in the last week, showing the market is starting to price in this tariff uncertainty.
Adding to the bearish case for Europe is the expected weakness in China’s economy, with Q3 GDP now seen falling below 5%. Since China remains a top-three trading partner for powerhouse economies like Germany, a slowdown there directly impacts European growth and exports. This external pressure further justifies a cautious or hedged stance on the Euro in the coming weeks.
