Italy’s consumer price index (CPI) for June shows a 1.7% increase from last year, matching early estimates. This is a slight rise from May’s rate of 1.6%. The harmonised index of consumer prices (HICP) rose by 1.8% year-on-year, surpassing the preliminary figure of 1.7%. This marks an increase from the previous month’s 1.7%.

Core Annual Inflation Trend

Core annual inflation, which excludes volatile items, increased from 1.9% in May to 2.0% in June. This indicates a mild upward trend in inflation pressures. Istat, Italy’s national statistics agency, released the data later than usual. Despite this delay, the European Central Bank likely finds these numbers manageable compared to inflation rates in other countries like Germany. Istat’s final data confirms that Italian inflation is stable, which is positive for the European Central Bank. With core inflation at just 2.0%, it sharply contrasts with Germany’s recent HICP rate of 2.8%. This suggests a growing divide within the Eurozone and supports the idea that the central bank should take a cautious approach to monetary policy.

Implications For Derivative Traders

For derivative traders, this means that expectations for immediate interest rate hikes may be overstated. Historical data from the aggressive 2022-2023 rate hikes shows how quickly the bank can act, but current conditions do not require such urgency. There are opportunities to position for a stable rate environment, possibly by selling out-of-the-money call options on December Euribor futures. The predictability of this inflation data should lower expectations for big economic surprises, leading to reduced market volatility. In fact, the Euro Stoxx 50 Volatility Index (VSTOXX) has dropped to 14 from over 18 earlier this year due to geopolitical concerns. We believe that selling volatility, such as shorting VSTOXX futures or selling strangles on the Euro Stoxx 50 index, could be a promising strategy in the upcoming weeks. Stable inflation is especially good for Italian sovereign debt, easing worries about the country’s financial situation. The spread between 10-year Italian BTPs and German Bunds has already narrowed to 130 basis points, with potential to tighten further toward the 115 basis points level seen last year. Traders may want to consider selling credit default swap protection on Italy, as the risk of widening spreads seems limited. This data underlines a dovish stance for the ECB, especially when compared to a Federal Reserve that is leaning towards a higher-for-longer approach in the U.S. ECB President Christine Lagarde’s recent remarks have been cautious, and this report gives her little reason to adopt a more aggressive tone. As a result, we anticipate downward pressure on the EUR/USD pair, currently near 1.0750, making long-dated puts on the Euro an intriguing opportunity. Create your live VT Markets account and start trading now.

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