Italy’s Consumer Price Index (CPI) rose to 1.6% year on year in February. This was up from 1.0% in the previous period.
The rise in Italian inflation is causing us to reconsider the European Central Bank’s path for interest rates this year. This isn’t an isolated event, as it follows recent data showing German inflation also ticked up to 2.1%, slightly above the ECB’s target. The market is now quickly reducing the odds of a widely expected rate cut in the second quarter.
Implications For Short Term Rates
We see an opportunity in positioning for higher short-term rates, as the ECB will likely have to pause its recent easing cycle. Specifically, selling forward Euribor futures contracts for the second half of 2026 looks attractive, as they still seem to price in a more dovish policy than is now likely. We were all reminded of how quickly sentiment can shift during the inflation scare we experienced through most of 2025.
This shift in ECB expectations should provide support for the Euro, which has been trading near 1.07 against the U.S. dollar. We are now looking at call options on the EUR/USD with expirations in the next three to six months to capture this potential strength. For equities, this implies tighter financial conditions, so we are also considering buying protective puts on the FTSE MIB index as a hedge against a potential downturn.
