Nomura’s Global Markets Research team says wage pressure in the euro area could keep inflation risks high in 2027–2028. It also says markets already expect the ECB’s next move to be a rate hike, not a cut. Markets are pricing in 13bp of rate hikes by December 2027 and 37bp by December 2028. The note also points to a tighter labour market as a medium-term source of upside inflation risk.

Euro Area Inflation Risks Outlook

The research says inflation risks in 2026 are tilted to the downside. In 2027—and especially 2028—risks tilt to the upside. It links this to strong wage growth and GDP growth running above potential in 2026 and 2027. Nomura expects two 25bp rate increases in 2028, likely in March and September. It adds there is a risk of earlier moves and additional hikes if inflation proves stronger than expected. The note compares today’s backdrop to the pre-financial crisis period: tight labour markets, unemployment below equilibrium, and growth above potential. It says Germany is the only country with spare services capacity, while the euro area overall, plus France and Italy, are running modestly hot. The article says it was created with an AI tool and reviewed by an editor, and it attributes the content to the FXStreet Insights Team.

Strategy Implications For Rates And Fx

We think wage pressure in the euro area will keep inflation from falling too far in the coming years. Recent data supports this: negotiated wage growth held at 4.3% year-over-year in Q4 2025, well above the ECB’s comfort zone. That makes a hike more likely than a cut as the ECB’s next move. The labour market is still very tight, which strengthens this view. Eurostat’s latest release put the unemployment rate at a record low of 6.4% in December 2025. This gives workers more bargaining power. We expect this tightness to last, pushing domestic inflation higher into 2027 and 2028. In the next few weeks, there is a gap between this longer-term view and the market’s focus on softer inflation readings in early 2026. Even if inflation risks lean lower this year, the key issue is the upside risk in 2027–2028 that the ECB is likely watching. That suggests current market pricing—only about 37bp of hikes by end-2028—may be too low. This creates a potential trade in interest rate derivatives. One approach is to position for a steeper yield curve, where long-term rates rise more than short-term rates. A way to express this is with forward-starting interest rate swaps that pay fixed in 2027 or 2028, based on the view that markets will eventually price in a more aggressive ECB path. We saw something similar in 2025, when markets priced in cuts too early. Those cuts never fully happened because services inflation stayed sticky. That episode is a reminder not to underestimate the ECB when domestic price pressure persists. With growth above potential across much of the euro area (except Germany), the current setup also resembles the pre-financial crisis period. This outlook could also support the euro over the medium term. As markets shift attention from the temporary softness in 2026 to a more hawkish 2027–2028 story, the single currency could strengthen. One possible strategy is to use options to build long EUR positions against currencies where central banks are expected to stay more dovish. Create your live VT Markets account and start trading now.

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