Eurozone GDP growth is projected to slow from 1.5% in 2025 to 1.0% in 2026, then rise to 1.3% in 2027. The slowdown is linked to spillovers from the Middle East conflict.
Inflation is projected at 2.1% in 2025, then rising to 3.0% in 2026 and 3.3% in 2027. Economic activity is expected to withstand energy shocks, supported by spending on defence, artificial intelligence, and electrification.
Key Macro Forecasts
The European Central Bank is expected to raise rates twice in 2026 by 25 basis points each. The first hike is expected in June, taking the deposit facility rate to 2.5%.
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With the European Central Bank expected to deliver its first rate hike in June, traders should position for higher short-term interest rates. Options strategies that profit from falling bond prices, such as buying puts on German Bund futures, could be effective. Interest rate swaps that pay a fixed rate in exchange for a floating rate are also a direct way to speculate on the anticipated 25-basis-point hike.
The forecast for inflation rebounding to 3.0% this year warrants attention, especially as the latest flash estimate for April showed inflation ticking up to 2.9%. This upward trend suggests that inflation-linked swaps could be valuable tools to hedge portfolios against rising price pressures. We saw how inflation surprised to the upside in late 2025, and this pattern appears to be re-emerging.
Trading Implications And Positioning
Slowing economic growth creates a challenging environment for stocks, which is reflected in the choppy performance of the Euro Stoxx 50 index so far this year. After the strong gains we saw in 2025, purchasing put options on broad market indices could protect against a potential downturn. The combination of slowing growth and rising inflation presents a significant headwind for corporate earnings.
The prospect of ECB rate hikes while other central banks may be holding steady should provide support for the Euro. In fact, the EUR/USD exchange rate has already strengthened from 1.08 to around 1.10 over the past two months in anticipation of this policy divergence. Traders could consider buying call options on the EUR/USD to profit from further currency appreciation.
However, the outlook is not uniformly negative, as investments in defence, AI, and electrification are expected to remain strong. A more nuanced trade could involve going long on derivatives tied to specific companies or ETFs in these resilient sectors. This could be structured as a pair trade, offsetting a short position on the broader market.
