Eurozone inflation eased to 2.8% in June, a move driven mainly by lower energy prices, while core inflation softened to 2.4%. Commerzbank expects the headline rate to hover near 3% over the coming months and through the second half of the year. The bank frames the June reading as a partial reversal after a sharp rise in the prior month, rather than evidence that underlying price pressures are subsiding.
Energy prices are forecast to edge down slightly, but firms are expected to pass through still-elevated energy costs, which remain above pre-Iran war levels, to customers. That dynamic would add to the indirect inflation effects monitored by the European Central Bank, and the bank’s baseline assumes a further ECB interest rate increase at the September meeting. The piece was produced using an AI tool and reviewed by an editor, and it is attributed to the FXStreet Insights Team.
Outlook For ECB Policy And Rate Expectations
We see the recent dip in Eurozone inflation to 2.8% as a temporary relief, not a change in the underlying trend. The core inflation reading, which strips out volatile energy, remains stubbornly above the ECB’s target, indicating persistent price pressures. We therefore expect the European Central Bank will proceed with another interest rate hike at its September meeting.
Given this outlook, we are positioning for higher short-term interest rates over the next two months. Overnight Index Swaps are already pricing in over a 70% chance of a 25 basis point hike in September, a number we see as likely to increase. We believe options that profit from a rise in EURIBOR futures hold value leading into that meeting.
Strategic Positioning Amid Persistent Inflation Pressures
This hawkish stance from the ECB should offer continued support for the euro. A recent survey from the ZEW Economic Research Institute showed investor morale in Germany unexpectedly improved, suggesting some resilience that could bolster the ECB’s case for tightening. We favor strategies like buying call options on the EUR/USD pair, betting on the euro strengthening as its rate advantage widens.
For equity markets, higher borrowing costs will likely act as a headwind for corporate earnings. We are therefore cautious on European stock indices and see potential for increased volatility. We are considering buying put options on the Euro Stoxx 50 as a hedge against a potential market downturn.
This situation feels similar to the 2022-2023 cycle, where markets initially celebrated falling headline inflation only to be caught off guard by the central bank’s resolve to fight sticky core prices. History suggests that second-round effects from high energy costs and wage growth can keep inflation elevated longer than expected. We are positioning for a market that is currently under-pricing this risk of “higher for longer” rates in Europe.
