Eurozone core harmonised consumer prices rose 0.2% month on month in June, easing from 0.3% in the prior reading. The move points to a slower pace of underlying price gains over the latest month.
Core HICP strips out volatile items and is closely watched for signals on domestic inflation pressure. June’s 0.2% rise leaves core inflation still positive on a monthly basis, but with less momentum than the previous month’s 0.3% increase.
Implications For ECB Policy And Rates Markets
The drop in Eurozone core inflation to 0.2% for June is a significant dovish signal. This data reinforces our view that the European Central Bank’s battle with inflation is nearing its end, giving them justification to ease policy further. We believe the market will now more aggressively price in future interest rate cuts.
This makes interest rate derivatives particularly interesting in the coming weeks. Following the ECB’s 25 basis point cut last month, this new data strengthens the case for another reduction by their September meeting. We are positioning for this by looking at futures contracts tied to the EURIBOR, which will rise in value as rate expectations fall.
A more dovish ECB will likely put downward pressure on the Euro. Historically, the currency has weakened against the U.S. dollar when the interest rate differential narrows in favor of the Fed. We are therefore exploring put options on the EUR/USD pair as a way to profit from this expected currency move.
Outlook For Equities And Volatility
This environment is generally favorable for European equities, as lower interest rates reduce borrowing costs for companies. We see this as a reason to be bullish on stock index derivatives. With the Euro Stoxx 50 already up 9% year-to-date, this cooling inflation could provide the catalyst for further gains through the summer.
Finally, this inflation report reduces a key point of uncertainty for the market. A more predictable path for the ECB should lead to lower expected market volatility. We see an opportunity in selling derivatives linked to the VSTOXX volatility index, as it is more likely to drift downwards from its current level of 15.
