Euro Area Inflation Baseline
In the baseline scenario, headline inflation rises slightly above 3% in the second quarter of 2026. It then falls steadily to just under 2% by the second quarter of 2027. Core inflation is projected to rise again starting in October. It is forecast to peak at 2.4% in the first quarter of 2027. Given the new reality of the Iran War, we must prepare for higher inflation driven by an energy shock. Brent crude futures have already surged past $115 a barrel, a level not seen since the initial energy spike of 2022, as the Strait of Hormuz effectively closes. This immediate price pressure means front-month oil and gas options contracts look attractive for gains in the coming weeks. The European Central Bank’s anticipated path of interest rate cuts is now highly unlikely to materialize as planned. Whereas in February 2026 markets were pricing in two rate cuts by year-end, overnight index swaps now suggest those cuts will be delayed well into 2027. Traders should consider selling Euribor futures contracts to position for interest rates remaining higher for longer.Inflation Linked Trading Opportunities
We expect headline inflation to push above 3% in the next quarter, creating a clear opportunity in inflation-linked derivatives. Euro area inflation swaps for the second half of 2026 appear mispriced, offering a chance to profit as the energy shock feeds through the economy. This is a stark contrast to the disinflationary trend we became accustomed to throughout 2025. The delayed effect on core inflation, which we see rising later this year and into early 2027, suggests a multi-stage trade. Looking back at the 2022 energy crisis, we saw a similar lag before energy costs broadly impacted services and goods prices. This historical pattern supports positioning for core inflation to begin its re-acceleration from October onwards. This sudden geopolitical event has caused a spike in market uncertainty, with the VSTOXX index, which measures Euro Stoxx 50 volatility, jumping over 35% in the last two weeks. Buying VSTOXX call options or options straddles on major European indices is a direct way to trade this heightened volatility. We expect this nervousness to persist as the conflict unfolds. Create your live VT Markets account and start trading now.
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