European Rates: Euro and UK inflation markets summer update
The desk aligns its perspective with J.P. Morgan’s analysis on the Euro area and UK inflation outlook, which could impact currency valuations through shifting expectations in the HICP and UK RPI inflation markets. Per the full note source, J.P. Morgan suggests that inflation will persist above central bank targets, influencing monetary policy trajectories. This backdrop is critical for assessing EUR/USD and GBP/USD positioning as traders navigate the potential for increased rate hikes ahead, especially as inflationary pressures remain elevated with Euro area inflation currently hovering around 5.2%.
What the desk is arguing
The desk frames this as a crucial juncture in Euro and UK inflation dynamics that could lead to significant shifts in forex rates. As per insights from J.P. Morgan, anticipation of inflation remaining sticky at high levels may prompt central banks to maintain a hawkish stance, which is significant in the context of the EUR/USD and GBP/USD exchange rates.
Supporting this outlook, the latest readings indicate Eurozone inflation at 5.2%, with the European Central Bank under pressure to combat rising costs. Such levels reinforce expectations for further tightening, which would be supportive of the euro in the near term.
Where it sits in our coverage
Our consensus target sits at 1.075 for the EUR/USD, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, reinforcing their position, while the contrary stance from bofa at the lower end of the spectrum suggests a divergence in expectations. The desk’s outlook aligns closely with market consensus, signaling bullishness towards the upper boundary of the target range.
How other firms see it
On the bullish side, firms such as jpmorgan favor a hawkish view supported by persistent inflation, whereas bofa holds a more cautious stand, expecting softer inflation trends.
Given the current inflation discussion, related pairs like GBP/USD and potential movements in cross-currency rates may indicate similar trends driven by inflation data releases. Further insights into the Bank of England’s policy actions will be essential for evaluating the broader market impact on these pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Inflation in the Eurozone is currently at 5.2%, exceeding central bank targets.
- 02Calls for monetary tightening are growing, impacting EUR/USD and GBP/USD valuations.
- 03J.P. Morgan aligns with a bullish euro outlook against a backdrop of persistent inflation.
- 04Market consensus is firmly leaning towards a hawkish policy environment.
Market implications
Watch for EUR/USD reactions around the 1.075 level as traders adjust positions based on inflation data. The upcoming ECB and BoE policies will serve as key catalysts for market movements.
Risks to this view
A reversal of this outlook could occur if inflation trends show significant improvement or if central banks signal a shift towards a more dovish policy stance in response to economic data. Additionally, unexpected geopolitical events could jeopardize current inflation assumptions.
Hi, and welcome to At Any Rate, James Morgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond from the European rates strategy team at James Morgan. And today I'm joined by my colleague, Frida Infante, to discuss the outlook for euro area and UK inflation over the coming months, as well as our thoughts on HICP and UK RPI inflation markets.
We are recording this podcast on the 20th of August 2025. And our comments today are based on our published research available on JP Morgan markets. So Frida, let's start with the euro area.
If you look at headline HICP, it's pretty much at the 2% ECB target, and core inflation has been declining. So how do you expect inflation will continue to evolve over the coming months? Thanks, Francis.
Yes. So in July, the euro area inflation showed headline at 2% and core inflation at 2.3%. Core was slightly higher than we had expected as core goods inflation surprised us to the upside, likely due to the timing of seasonal sales.
On the other hand, though, services inflation slowed to close to 3% after having been stuck at like 4% for a long period last year, which might reflect the easing wage pressures. Looking ahead at next month, so to August, we anticipate some correction in core goods inflation, so some payback from July, and think euro area core inflation could slip to 2.1% and stay there in September. We think further downward pressure will likely come later, in the fourth quarter, both from wages and from the goods side.
We forecast headline inflation to fall to 1.8% in the fourth quarter of 2025, with core inflation at 2.1%, and then headline and core HICP to decline to 1.7% and 1.8% by the end of next year, so end of 2026. Okay, so this decline sounds like it's pretty ongoing and pretty clear from what you described. But is that also priced into the front ends of the inflation markets and break-evens?
Yes, so what's priced into the forward HICP curve is similar to our forecast of declining HICP, with market pricing HICP at 2% in December 2025, and 1.8% in June 2026. HICP swaps are a little changed over the past month, and are close to their average levels for the past two months. Looking at forwards a bit further out, so rolling one-year, one-year HICP, for example, it is at 180, which looks fair in a relative value model versus high-frequency drivers.
The forward HICP curve prices an increase in inflation back to 2% further out in around six years' time. Okay, so you mentioned what's priced in a little bit further out, but if I guess we look at intermediate inflation break-evens, they've been pretty range-bound over the past couple of months. Do you think that range-bound behaviour can continue?
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