Why should you further reduce your speed here?

Your answer is correct. You should reduce your speed because the red car might cross into your lane, and because pedestrians may enter the road unexpectedly. According to German traffic rules, anticipating possible hazards—such as a vehicle that could swerve or people who might step onto the road—is essential for safety. Slowing down in such situations allows you more time to react and prevents accidents. The option about the blue car continuing to move is less relevant here for reducing speed, as it does not present an immediate risk requiring you to slow down. Always consider potential dangers around you and adjust your speed accordingly.