France’s EU-harmonised Consumer Price Index (CPI) month-on-month (MoM) was -0.4% in January. This matched the forecast of -0.4%.
The French inflation number for January, coming in as expected at -0.4% month-on-month, confirms the disinflationary trend we have been watching across the continent. This wasn’t a shock to the market, but it solidifies the view that price pressures are rapidly fading. This aligns with recent data showing broader Eurozone inflation fell to 1.1% in the last annual reading, well below the central bank’s target.
Implications For Ecb Policy
We believe this puts immense pressure on the European Central Bank to adopt a more dovish stance in their upcoming meetings. The probability of an interest rate cut before the summer has now increased significantly, a move that will be priced into EURIBOR futures. Remember, looking back at 2025, the ECB held rates firm to ensure inflation was defeated, but the risk has now clearly shifted.
For equity derivatives, this suggests a focus on volatility, as the market is torn between two opposing forces. While the prospect of cheaper money is good for stocks, the fear of deflation and its impact on corporate earnings is a major concern, especially as Germany’s manufacturing orders have declined for three straight months. We expect to see increased buying of protective put options on the Euro Stoxx 50 index.
This data further weakens the case for the Euro, and we anticipate continued downward pressure on the currency. As the interest rate differential with the U.S. is set to widen, trading strategies that benefit from a lower EUR/USD exchange rate look increasingly attractive. The path of least resistance for the single currency appears to be lower in the near term.
This environment is becoming reminiscent of the 2014-2015 period we saw over a decade ago, which was characterized by persistent low inflation fears. That situation ultimately forced the ECB into aggressive asset purchase programs to avoid a deflationary spiral. Traders should be positioned for the possibility of renewed unconventional policy talk if this trend continues through the first quarter.
