Germany\u2019s consumer price index rose 2.3% year on year in June, coming in below the 2.5% market forecast. The reading points to a softer inflation backdrop than expected, based on the latest annual comparison.<\/p>\n
The downside surprise means headline CPI increased at a slower pace than consensus had pencilled in for the month. No further breakdown was provided in the release.<\/p>\n
Germany’s consumer price index coming in at 2.3% is a significant miss against the 2.5% forecast. This reinforces our view that disinflationary pressures are gaining momentum in the Eurozone’s largest economy. We believe this data will force the European Central Bank to adopt a more dovish tone in the coming weeks.<\/p>\n
Consequently, we are looking at interest rate futures, as the market rapidly reprices the odds of an earlier rate cut. Overnight index swaps now imply a 45% chance of a cut by the September meeting, up from 20% just last week. This makes buying December Euribor futures an attractive strategy to front-run a potential policy pivot from the ECB.<\/p>\n
We see this news as bearish for the Euro, which has already slipped below the key 1.0750 level against the dollar. With US inflation data remaining comparatively firm, the policy divergence between the Fed and ECB is likely to widen. We are therefore looking to buy EUR\/USD put options with a three-month expiry to capitalize on a potential slide towards the 1.0600 mark.<\/p>\n
The prospect of lower borrowing costs should provide a tailwind for European equities, especially the German DAX. The index has been trading in a tight range, and this could be the catalyst for an upside breakout. We are positioning for this by buying call options on the DAX, targeting a move towards the 19,000 level last seen in the first quarter.<\/p>\n
This disinflationary print is also clearly bullish for government bonds. The German 10-year bund yield has already fallen 10 basis points to 2.45% on the news. To position for yields moving even lower, we are adding to our long positions in German Bund futures.<\/p>\n\n\n\n