Spain’s consumer price index rose by 1.2% month on month in March. This was above the 1.0% forecast.
The March figure was 0.2 percentage points higher than expected. No further details were provided.
Implications For ECB Policy
The higher-than-expected Spanish inflation figure for March is a significant data point, suggesting that price pressures within the Eurozone are more persistent than anticipated. This aligns with the recent flash estimate for the entire Eurozone, which showed headline inflation holding at a sticky 2.8%, surprising those expecting a faster decline. These figures force us to reconsider the timing and likelihood of the European Central Bank’s next interest rate cut.
Just last week, interest rate swap markets were pricing in a greater than 70% probability of a rate cut by June. Following this inflation data from Spain, a core European economy, those odds have now dropped to below 40%, signaling a major reassessment by the market. This supports the recent cautious tone from ECB officials who have stressed that policy decisions remain strictly data-dependent.
We should consider positioning for further Euro strength, as a more hawkish ECB will make the currency more attractive. Buying short-dated EUR/USD call options is an effective way to gain upside exposure while managing risk. The increased volatility in rate expectations will likely add to the premium on these options, but the potential payoff is significant if the ECB is forced to delay its easing cycle.
Market Positioning Considerations
Looking back at 2025, we saw how European equities rallied on the prospect of rate cuts after the difficult inflationary period that started back in 2022. This new data threatens that rally, making short positions on equity indexes like the Euro Stoxx 50 via futures contracts look increasingly attractive. Similarly, we anticipate German Bund futures will face downward pressure as yields must now adjust to the reality of stickier inflation for longer.
