Rising oil prices are reducing eurozone household purchasing power, mainly through higher fuel costs. Driving behaviour has mostly returned to pre-pandemic patterns, so cutting mileage to offset higher pump prices may be limited. Only the pandemic years showed clear departures from the long-term average in driving distances, linked to widespread working from home. Fuel prices were not cited as the main reason for those changes.

Income Squeeze From Fuel Costs

As mileage normalises, a larger share of disposable income is expected to go on fuel. In Germany, this share is forecast to rise to 3.5% from 2.8% last year. Last year, the share of disposable income spent on fuel was around 2% in the Netherlands and 4.5% in Portugal. This suggests uneven pressure across countries as energy costs rise. Higher energy prices are also expected to add strain to consumer confidence, which is already low. The piece notes that pump prices tend to rise faster than they fall, affecting both confidence and purchasing power. With Brent crude oil prices now hovering around $95 a barrel, the squeeze on household purchasing power is becoming a primary market theme. The core issue is that driving patterns have returned to pre-pandemic norms, meaning consumers cannot easily cut back on fuel usage. This directly erodes disposable income, creating a significant headwind for the economy.

Trading Implications For European Markets

This pressure is already visible in sentiment data, with the latest European Commission figures showing consumer confidence dipping further to -18.5. Historically, when confidence is this low and household budgets are strained, spending on non-essential goods is the first to be cut. We anticipate weakness in sectors heavily reliant on discretionary spending. For traders, this points toward a bearish stance on consumer-facing European equities. Buying put options on automotive and retail sector ETFs could offer a way to capitalize on a slowdown in consumption over the coming weeks. Individual company stocks in these sectors are also likely to face downward pressure. The most recent macroeconomic data, which showed Eurozone retail sales falling by 0.4% in January, confirms this trend is already underway. This broader economic drag suggests short positions on major indices, like the Euro Stoxx 50, could be warranted. Protective puts on the index can serve as an effective hedge against a wider market downturn. This environment presents a dilemma for the European Central Bank, as the latest flash estimate showed headline inflation ticking up to 2.8% even as growth falters. This could delay anticipated rate cuts, creating opportunities in interest rate derivatives that bet on rates remaining higher for longer than currently priced in. This policy uncertainty could also weigh on the EUR/USD exchange rate. Looking back at the energy shock of 2022 from our perspective in 2025, we observed a very similar dynamic where elevated energy costs quickly translated into weaker consumption and a broader economic slowdown. That historical precedent suggests the market may be underestimating how rapidly this situation can impact corporate earnings. This makes positions that profit from increased market volatility, such as buying options on the VSTOXX index, appear attractive. Create your live VT Markets account and start trading now.

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