Nomura economists state that the latest rise in energy prices is likely to weigh more on euro area growth than to cause a lasting inflation shock. They point to weaker labour markets in Northern Europe, limited fiscal space, more spare capacity and slowing wage growth.<\/p>\n
Energy prices are described as high but below 2022 levels. In 2022, oil prices stayed above $100 from late February to end-July, while European gas prices peaked at about \u20ac340MWh, compared with a recent peak of just over \u20ac60MWh.<\/p>\n
The IMF\u2019s latest semi-annual forecasts estimate the euro area output gap in 2026 at around -0.2% of potential GDP, versus +0.8% in 2022. This suggests more spare capacity than during the earlier energy shock.<\/p>\n
Tighter monetary policy is linked to an ongoing slowdown in inflation across Europe, which began before the US\/Iran war. Services inflation is noted as still showing some persistence, while near-term price pressure and expectations continue to be monitored.<\/p>\n
The view that the recent energy price shock is more of a threat to growth than inflation suggests the European Central Bank may be forced into a more dovish stance. We are already seeing signs of this, as the latest HCOB Flash Eurozone Composite PMI for April 2026 unexpectedly dropped to 48.5, indicating a contraction in business activity. This points towards positioning for lower interest rates through derivatives like Euribor futures contracts for the coming months.<\/p>\n
While the latest Eurostat flash estimate showed headline inflation ticking up to 2.8%, this appears driven by the energy component. More importantly for the ECB’s direction, core inflation fell to a two-year low of 2.5%, supporting the idea that underlying price pressures are weak despite some lingering stickiness in services. The significant policy tightening we saw back in 2023-2024 has clearly curtailed demand-side price pressures across the bloc.<\/p>\n
This outlook for weakening growth puts European equity indices at risk. We should consider buying put options on the Euro Stoxx 50 as a hedge or a direct bet on a downturn in the coming weeks. Implied volatility on European indices may also be relatively inexpensive if the market remains overly focused on inflation, offering a good entry point to position for a potential growth scare.<\/p>\n
A dovish ECB, contrasting with a Federal Reserve that is holding rates steady due to a more resilient US economy, creates a clear policy divergence. This strengthens the case for bearish positions on the euro against the US dollar. We can express this view through selling EUR\/USD futures or buying options that will profit from a lower exchange rate.<\/p>\n
It is important to remember the context from last year when this perspective gained traction. Even with the recent energy surge, European gas prices at around \u20ac65\/MWh are nowhere near the crippling \u20ac340\/MWh peaks we witnessed in 2022. This supports the argument that the central bank will prioritise avoiding a deep recession over fighting an inflation threat that appears increasingly contained.<\/p>\n
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