Euro Area

The ECB is about to make its first policy mistake in the current cycle by being complacent about the downside risks to inflation. The confluence of base effects, a stronger euro, food and energy deflation, and rapid services disinflation will push headline inflation closer to 1% in the first half of the year. This significant undershoot will force the ECB to deliver reflationary cuts. Go long the September 2026 3-month Euribor futures and tactically reduce exposure to inflation-linked bonds in the Eurozone.