Euro Rate-Inflation Mismatch Creates Trading Opportunities: Bank of America

Bank of America believes that euro area interest rates and inflation expectations have diverged, creating trading opportunities as markets price in too many European Central Bank hikes.

The bank's strategist, Ralf Preusser, argued that natural gas prices have reached new highs since the start of the war in Iran, pushing markets to discount almost four full ECB hikes for this cycle. However, he noted that even with the run-up in natural gas prices, futures markets are pricing in a scenario that is entirely consistent with the ECB's base case.

The weighted average of gas and oil implied by futures remains in line with the ECB's June base case and well below its adverse scenarios, according to BofA. For the central bank to feel pressured to do more than the 60 basis points of cumulative hikes embedded in those forecasts would require significant upside surprises to energy prices.