Eurozone Inflation: SOFR vs Euribor pricing too divergent, 2026 priced for 3 Fed cuts, 0 ECB cuts

Our Eurozone leading indicator confirms inflation is peaking. On an unsmoothed basis, our headline CPI LEI has edged lower again to 2.9% YoY.

Other key leading data confirm the peak in inflation pressures. For example, service sector price expectations are edging lower, and inflation expectations have been muted after the initial Liberation Day jump.

With inflation falling and growth steady, EUR real yields (e.g. 5y5y real OIS) seem too high. Meanwhile, our ECB regime model remains firmly in the easing regime.

There is currently a large spread between the Dec 25/26 SOFR pricing vs the Dec 25/26 Euribor pricing. Essentially the market is saying to expect 3 Fed cuts in 2026, but 0 ECB cuts. While either policy path could be justified in isolation, the likelihood of both occurring would require a very strange macro environment.

We like the risk-reward of betting on a convergence of the SOFR vs Euribor Dec 25/26 spread given our relatively benign outlook for the US and Eurozone economies. A lower EURUSD would be a similar trade.