Eurozone core Harmonised Index of Consumer Prices (HICP) was unchanged month on month in May, holding at 0.3%. The reading indicates that underlying price pressures did not accelerate on a monthly basis over the period.
With the core HICP rate steady at 0.3% in May, short-term momentum in consumer prices remained stable. The data point leaves the month-on-month measure flat relative to April, offering no change in the pace of core inflation at the margin.
ECB Policy Implications And Market Positioning
The May core inflation figure came in at 0.3% month-on-month, showing that underlying price pressures are not fading. This stickiness is a problem for the European Central Bank and tells us the fight against inflation is not over. We should not expect any immediate dovish shifts in policy.
This persistent inflation is being driven by the services sector, where price growth was last reported at a high 4.1% year-over-year. Strong wage growth, which Eurostat confirmed was 4.5% in the first quarter of 2026, is fueling this pressure. These numbers give the ECB very little room to consider cutting interest rates in the near term.
Therefore, we believe the market is pricing in rate cuts too aggressively for the September and October ECB meetings. We are adjusting our positions in interest rate swaps to reflect a “higher for longer” policy reality. Futures contracts based on EURIBOR appear mispriced, and we anticipate an upward correction as the market digests this data.
Lessons From The Past And Trading Opportunities
This situation is very similar to what we saw in late 2023, when markets incorrectly anticipated central bank pivots and were caught off guard. Those who bet on early rate cuts faced significant losses as inflation proved more stubborn than expected. We must remember that lesson and avoid making the same mistake now.
We see this creating an opportunity for the Euro to strengthen against the US dollar, as the Federal Reserve has signaled a clearer path towards easing. We are looking at call options on the EUR/USD pair to position for this potential divergence. Furthermore, with policy uncertainty rising, implied volatility on equity indexes like the Euro Stoxx 50 seems too low, making options strategies like straddles attractive.
