Eurozone core Harmonised Index of Consumer Prices rose 2.4% year on year in June, undershooting the 2.6% forecast. The reading indicates underlying inflation pressures eased more than markets had pencilled in.
Core HICP excludes energy, food, alcohol and tobacco, and is monitored closely by the European Central Bank when assessing the persistence of price growth. The June outcome, coming in below expectations, adds to evidence that disinflation is continuing across the currency bloc, although the data release alone does not pre-empt future policy decisions.
ECB Policy Outlook and Interest Rate Implications
This lower-than-expected core inflation figure strengthens the case for monetary policy easing from the European Central Bank. The data suggests that underlying price pressures are cooling faster than anticipated, giving the ECB more room to consider rate cuts. We are therefore increasing the probability of a first 25 basis point cut occurring in the fourth quarter of this year.
Given this outlook, we are adjusting our positions in interest rate derivatives to reflect a more dovish ECB path. Euribor futures are looking attractive, as current market pricing has not fully factored in a potential cut before year-end. We will be looking to build long positions in contracts for December 2026 and March 2027 delivery.
Foreign Exchange and Equity Market Strategies
The policy divergence between a dovish ECB and a potentially more cautious U.S. Federal Reserve should put downward pressure on the EUR/USD exchange rate. The latest US jobs report showed continued strength, with over 200,000 jobs added last month, supporting the Fed’s “higher for longer” narrative. We see value in buying put options on the Euro to position for a decline towards the 1.05 level in the coming months.
For equity markets, this environment is broadly positive, as lower expected interest rates increase the valuation of future corporate earnings. The EURO STOXX 50 volatility index (VSTOXX) has already fallen below 15, indicating lower perceived risk among investors. We believe buying call options on major European indices like the DAX and EURO STOXX 50 is a prudent way to gain upside exposure.
