Stagflation in the Eurozone: Real Risk or False Alarm?

The macro point

Contrary to what is sometimes mentioned, the eurozone is not in stagflation. Not yet. German inflation is expected to be +2.4% year-on-year for May, just above the ECB's target of 2%. German GDP even surprised on the upside in Q1 (+0.3% quarter-on-quarter), showing unexpected resilience in the face of energy shocks. It's hard to speak of stagnation under these conditions.

However, warning signals are multiplying. According to us, three elements justify vigilance. First, budget deficits are slipping: the European Commission raised its estimate for France to 5.1% of GDP in 2026, and that of Germany to 3.7%. These reduced fiscal margins will limit the ability of states to cushion a new shock. Next, the US-Iran conflict keeps Brent around $105, up 25% since the start of the year. This pressure on energy costs is slowly but surely spreading through European production chains. Finally, the UK industry (a useful proxy for European industry) shows its order books at their lowest since 2020 according to the CBI survey in May. This is not trivial.

This context places the ECB in an uncomfortable position. It will likely raise its rates in June, but it will certainly be the last hike of the cycle. The real question is no longer "hike or pause," but "how long before the first cut?" It's hard to know if this pivot will occur by autumn or later.

For the euro, it's a short-term pressure factor. Investors are starting to integrate this change of narrative: the EUR/USD has fallen from 1.2019 to 1.1617, a drop of more than 3% in four months. The real 2-year rate differential between the US and the eurozone has widened, mechanically supporting the dollar. And if Europe indeed falls into real stagflation this summer - without the ECB being able to react effectively - the euro will continue to bend.

Technical point

On the forex market, the EUR/USD remains under pressure. The pair trades around 1.1617. The psychological threshold of 1.15 becomes a tangible target again if Friday's US PCE confirms the persistence of inflationary pressures across the Atlantic. Conversely, a return to 1.18 would require a combination of de-escalation in the Middle East and positive economic surprises in the eurozone. Unlikely in the short term.

Unsurprisingly, the Swiss franc continues to play its traditional role as a safe haven. The EUR/CHF stagnates around 0.9107, near its annual lows. The SNB, unlike other major central banks, keeps its rates at 0% and thus accepts the strength of its currency as a tool against imported inflation. This configuration should persist as long as geopolitics acts up.

The yen remains under tension. The EUR/JPY hovers around 185, after crossing the critical threshold of 187 at the end of April, which triggered a presumed intervention by the Japanese Ministry of Finance.

The British pound, finally, struggles to benefit from its rate differential. The EUR/GBP remains around 0.8637, in a narrow trading range. The expectations of a BoE hike in June have dropped from 80% to merely 50/50 after the last MPC statement. Declining industry, sluggish consumption: it's hard to see the pound appreciating sustainably in these conditions.

The supports and resistances displayed below indicate the low and high points within which the rates should evolve during the week.

Announcements to follow

The week promises to be full of macro data, culminating with the publication of the US PCE on Friday - the Fed's favorite indicator for measuring inflation. Any upward slip would mechanically strengthen the dollar. On the eurozone side, the German IFO on Tuesday and especially the preliminary German inflation figures on Friday will be decisive for the June ECB decision. A declining IFO or decelerating inflation would reinforce the "one and done" scenario for the ECB.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used or relied upon as an opportunity to engage in any investment.