Spain’s Harmonised Index of Consumer Prices (HICP) rose 2.4% year on year in January. The result was below the expected 2.5%.
The data indicates inflation was slightly lower than forecast for the month. No further figures were provided in the update.
Eurozone Disinflation Trend
The lower-than-expected Spanish inflation figure from January, at 2.4%, reinforces a trend we are seeing across the bloc. This aligns with the recent flash estimate for the entire Eurozone, which showed headline inflation easing to 2.6%. This data point strengthens the case that price pressures are genuinely moderating.
Consequently, we see market expectations for a European Central Bank rate cut firming up significantly. Interest rate swaps are now pricing in more than a 60% probability of a 25 basis point cut by the June meeting. This pivot towards monetary easing is becoming the dominant market narrative.
For us, this suggests positioning for lower yields through interest rate futures. We are looking at building long positions in derivatives like the Euro Schatz futures. This is a direct play on the ECB acting on these disinflationary signals in the coming months.
We should also anticipate weakness in the euro, as interest rate differentials with the U.S. will likely widen. Reviewing the market action we saw through 2024, when rate cut expectations first emerged, shows a clear precedent for euro depreciation. We consider buying euro put options against the dollar as a cost-effective way to position for this move.
Equity Options Strategy
This environment is also supportive for European equities, but with volatility so low, direct long positions carry risk. The VSTOXX index is currently trading near 14.5, making long-dated call options on indices like the Euro Stoxx 50 an attractive strategy. This offers upside exposure to a potential equity rally while defining our risk.
