March Inflation Confirms Policy Constraints
The latest German inflation figure confirms what we’ve been seeing. A high monthly print of 1.2% met expectations, which removes any immediate surprise from the market. This reinforces the view that the European Central Bank has little room to soften its stance on interest rates. Looking back from our 2025 perspective, the sharp 15% rise in energy futures during the fourth quarter made this outcome almost inevitable. We saw core inflation, which excludes energy, also tick up to an annualized rate of 4.5% in February, signaling these price pressures are becoming embedded. This March number is simply the expected result of those earlier trends. For those trading interest rates, this cements the “higher for longer” narrative for German yields. Short positions on Bund futures remain the consensus trade, as the path of least resistance for yields is upwards. We don’t expect a major repricing today, but any dip in yields will likely be seen as a selling opportunity. This sustained inflationary pressure will act as a ceiling for the German DAX index. We can expect traders to use options to bet on a range-bound or slightly negative market, possibly by selling out-of-the-money call options. With this inflation data now public, a near-term drop in implied volatility on the index is also a strong possibility.Euro Support And Market Positioning
The Euro should find continued support from this data, as it solidifies the ECB’s relatively hawkish policy path. We’ve seen the US Federal Reserve signal a potential pause in its own hiking cycle last month, with US CPI falling to 3.1% recently. Therefore, positions that favor Euro strength, especially against the US dollar, seem well-justified for the coming weeks. Create your live VT Markets account and start trading now.
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