Nomura analysts say the European Central Bank is expected to focus on its end-of-horizon HICP inflation forecast, rather than react to recent energy-driven market moves. They expect higher crude oil and natural gas prices to raise the ECB’s projected euro area inflation path. They note that a January downside surprise in HICP inflation versus the ECB’s expectations may partly offset the forecast lift from higher energy prices. They also refer to the ECB’s December forecast that euro area HICP inflation would undershoot its target from Q3 2026 to Q4 2027.

ECB Expected Rate Path

They expect the ECB to keep interest rates unchanged in 2026 and 2027. On their view, rate rises would come only in 2028 to keep HICP inflation around target in 2028. They identify the US/Israel conflict with Iran as a near-term risk through its impact on oil and gas prices, which could push inflation higher and bring rate rises forward. They add that persistence in energy price moves will affect how much feeds through to HICP inflation, and note that euro area inflation markets have partly retraced. We believe the European Central Bank will look through the recent spike in energy prices caused by geopolitical tensions. The ECB’s primary focus remains on its long-term inflation forecast, which, as of their December 2025 projections, showed inflation undershooting its target in late 2026 and 2027. Eurostat’s latest flash estimate for February 2026 showed core inflation falling to 2.7%, giving policymakers room to wait. For traders, this suggests that market pricing for near-term ECB rate hikes may be overly aggressive. This presents an opportunity in interest rate derivatives, such as positioning for Euribor futures to reflect a continued hold on policy rates through this year and next. We saw a similar situation in mid-2025 when the market got ahead of itself pricing in policy moves that were slow to arrive.

Volatility And Market Positioning

Implied volatility, particularly in Euro area equity and bond markets, likely rose too quickly on the conflict news. With Brent crude having pulled back from its late-February 2026 peak of over $95 a barrel to around $88, selling volatility on instruments like Euro Stoxx 50 options could be advantageous. This strategy bets that the ECB’s steady hand will calm markets in the coming weeks. A patient ECB, while other central banks may be on different paths, could put gentle pressure on the Euro. Therefore, currency derivative strategies that benefit from a stable or slightly weaker EUR/USD exchange rate should be considered. The primary risk to this view is a significant and sustained escalation of the conflict that keeps energy prices persistently above $100. Ultimately, the key variable to monitor is whether the current energy price levels become persistent. Short-term spikes can be ignored, but as we saw during the 2022 inflation wave, energy costs that stay high for many months will eventually pass through to core prices. This would force the ECB to reconsider its patient stance and act sooner than our 2028 base case. Create your live VT Markets account and start trading now.

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