Buy 1Y1Y vs. 5Y5Y EUR inflation swap

The EUR inflation curve has declined, particularly at the front end, with the 1Y1Y inflation swap trading at 1.70-1.75%, its lowest since late 2021, while the 5Y5Y remains above 2.0%. Brent crude oil prices (€/b) has declined by 15% since Q3 2024 and has contributed to downward pressure on inflation expectations exacerbating the disinflationary trends and slowing growth in the Eurozone. However, we believe the market may have largely priced in this trend, and upcoming signals could favo u r the front end of the curve, pointing to more upside risks for short-term inflation. Key triggers include upcoming Eurozone wage data, HICP fixings suggesting inflation may exceed 2.0%, potential U.S. Republican policies impacting global inflation, and recent euro weakness. We recommend a flattener trade by buying the 1Y1Y swap and selling the 5Y5Y swap (entry: 39bp; target: 31bp; stop-loss: 43bp; horizon 3m).