Eurozone core HICP was flat month on month in July, printing 0% after a 0.2% rise in the prior period. The move points to a loss of price momentum in the latest monthly reading.
Compared with the previous month’s gain, the July outturn indicates a softer near-term pace for core inflation pressures. The core HICP measure excludes volatile components and is used to assess underlying price trends across the currency bloc.
Implications for Monetary Policy and Interest Rate Derivatives
With Eurozone core inflation flattening to 0% in July from 0.2% in June, we see a clear signal that underlying price pressures are cooling faster than expected. This flat monthly reading suggests the annual core inflation rate is on track to drop toward 2.1%, down from the previous month’s 2.3%. We believe this data gives the European Central Bank plenty of room to continue its monetary easing cycle in the coming weeks.
In the interest rate derivatives market, we expect Euribor futures to gain upward momentum as traders price in more aggressive rate cuts. Historically, when monthly core inflation stalls during the summer, policymakers tend to lean dovish at their upcoming September meetings. We recommend that derivative traders build long positions in near-term Euribor futures to capture these shifting rate expectations.
Market Reactions: FX, Bonds, and Equities
For currency traders, this softer inflation print is likely to weigh heavily on the Euro against its major peers. Since other central banks are maintaining a more cautious stance, the yield differential will likely favor the U.S. dollar, driving the EUR/USD pair lower. We suggest buying short-term EUR/USD put options with strike prices targeting the 1.0700 level over the next few weeks.
We also anticipate a strong rally in Eurozone government bonds, which will push yields down and futures prices up. The benchmark German 10-year Bund yield, which recently hovered near 2.3%, could easily slide toward 2.1% as inflation fears subside. Derivative traders should look to go long on Euro-Bund futures to capitalize on this fixed-income momentum.
Finally, cheaper borrowing costs should provide a massive tailwind for European equities, which have faced stiff headwinds over the last two years. As rate-cut expectations solidify, we expect major indices like the DAX and CAC 40 to break out of their recent tight ranges. Buying call options on these indices with an expiration of late September looks like a highly attractive play right now.
