Nomura economists state that the latest rise in energy prices is likely to weigh more on euro area growth than to cause a lasting inflation shock. They point to weaker labour markets in Northern Europe, limited fiscal space, more spare capacity and slowing wage growth.
Energy prices are described as high but below 2022 levels. In 2022, oil prices stayed above $100 from late February to end-July, while European gas prices peaked at about €340MWh, compared with a recent peak of just over €60MWh.
The IMF’s latest semi-annual forecasts estimate the euro area output gap in 2026 at around -0.2% of potential GDP, versus +0.8% in 2022. This suggests more spare capacity than during the earlier energy shock.
Tighter monetary policy is linked to an ongoing slowdown in inflation across Europe, which began before the US/Iran war. Services inflation is noted as still showing some persistence, while near-term price pressure and expectations continue to be monitored.
The view that the recent energy price shock is more of a threat to growth than inflation suggests the European Central Bank may be forced into a more dovish stance. We are already seeing signs of this, as the latest HCOB Flash Eurozone Composite PMI for April 2026 unexpectedly dropped to 48.5, indicating a contraction in business activity. This points towards positioning for lower interest rates through derivatives like Euribor futures contracts for the coming months.
While the latest Eurostat flash estimate showed headline inflation ticking up to 2.8%, this appears driven by the energy component. More importantly for the ECB’s direction, core inflation fell to a two-year low of 2.5%, supporting the idea that underlying price pressures are weak despite some lingering stickiness in services. The significant policy tightening we saw back in 2023-2024 has clearly curtailed demand-side price pressures across the bloc.
This outlook for weakening growth puts European equity indices at risk. We should consider buying put options on the Euro Stoxx 50 as a hedge or a direct bet on a downturn in the coming weeks. Implied volatility on European indices may also be relatively inexpensive if the market remains overly focused on inflation, offering a good entry point to position for a potential growth scare.
A dovish ECB, contrasting with a Federal Reserve that is holding rates steady due to a more resilient US economy, creates a clear policy divergence. This strengthens the case for bearish positions on the euro against the US dollar. We can express this view through selling EUR/USD futures or buying options that will profit from a lower exchange rate.
It is important to remember the context from last year when this perspective gained traction. Even with the recent energy surge, European gas prices at around €65/MWh are nowhere near the crippling €340/MWh peaks we witnessed in 2022. This supports the argument that the central bank will prioritise avoiding a deep recession over fighting an inflation threat that appears increasingly contained.
