Insights 
VT 
Higher tariffs, a stronger euro, and increased competition are affecting growth. Investment should be supported by government spending.
Recent surveys indicate growth in both the manufacturing and services sectors. The growth reflects the resilience of domestic demand.
Economic Risks Are More Balanced
Economic risks are now more balanced, having been previously skewed to the downside. The inflation outlook remains more uncertain than usual, with no clear indication of risks.
A stronger euro could potentially lower inflation more than expected. The disinflationary process has concluded, and the economic position remains stable.
Inflation aligns with targets, and the domestic market continues to show resilience. A unanimous decision has been made, with trade uncertainty having decreased.
There is an understanding that minimal deviation from the target will not necessarily prompt action. The overall economic environment remains favourable despite external pressures.
The ECB’s New Position
The European Central Bank is telling us that the period of falling inflation is officially over and that the economy is resilient. With risks to growth now seen as balanced, the market was caught off guard, causing an immediate spike in the euro against the dollar. This signals that the path of least resistance for the euro is now higher, as the central bank is no longer fighting inflation but is comfortable where it is.
Given this shift, we should consider buying near-term call options on the euro. The ECB has explicitly stated that a stronger euro could help keep inflation in check, essentially giving a green light to further currency appreciation. A move towards 1.1100 in EUR/USD seems plausible, as the market reprices the odds of the ECB staying on hold for longer than previously anticipated.
On the interest rate front, the message is that policy will remain steady, as minimal deviation from the inflation target will not force a move. This means the market has likely been too aggressive in pricing rate cuts for late 2025 or early 2026. We can express this view by selling December 2025 Euribor futures, betting that short-term interest rates will not fall as expected.
This view is supported by the latest data, with August 2025 Eurozone inflation holding firm at 2.1% and the recent flash PMI survey for September showing continued expansion at 51.2. These figures underpin the central bank’s confidence in both its inflation target and the strength of domestic demand. The unanimous decision reinforces the conviction behind this patient stance.
We must remember the lessons from the 2022-2023 hiking cycle when the market consistently underestimated the ECB’s resolve. The current communication suggests a similar pattern where the bank will tolerate stable, albeit not booming, economic conditions without rushing to ease policy. Therefore, positioning for a “higher for longer” rate environment is the prudent course of action.
For equity index traders, the stronger euro creates a headwind for the region’s large exporters, which could limit upside for benchmarks like the German DAX. We could hedge long equity exposure by purchasing puts on the Euro Stoxx 50 index. This would protect against potential downside caused by currency strength weighing on corporate earnings.
