Europe’s inflation is easing faster than America’s, but investors still seem reluctant to price what a renewed rate-and-growth split could do to stocks, bonds, and the dollar.
The global “soft landing” narrative is getting a second act, but with a twist: the inflation problem is no longer symmetrical. In the eurozone, price growth has slipped below target just as the European Central Bank keeps policy steady, reviving the debate over whether Europe’s next meaningful move is down, not up.
In the U.S., the Federal Reserve is also standing pat—but with a different posture. The Fed’s latest implementation decision kept the rate paid on reserve balances at 3.65%, a reminder that “higher for longer” is not a slogan so much as a default setting when policymakers fear rekindling inflation expectations.
That divergence matters less for the first 25 basis points than for what it does to currencies and financial conditions. A stronger euro can suppress imported inflation in Europe—but it also tightens conditions for European exporters and, crucially, transmits disinflation globally through trade. Meanwhile, a U.S. economy that slows more from policy uncertainty or a softer labor backdrop doesn’t necessarily guarantee rapid easing if inflation is still sticky in services and shelter.
Equity investors, especially in U.S. large caps, have treated rate stability as permission to pay for duration again. The SPDR S&P 500 ETF Trust (SPY) sits at the center of that bet: that earnings can grow while discount rates stop rising. Yet the more plausible “risk” for 2026 isn’t a surprise hike—it’s a currency-driven tightening that arrives quietly, compressing multinational revenue translations and reshuffling global capital flows even if policy rates barely budge.
The investing playbook, then, is less about guessing the next meeting and more about building portfolios that survive an FX regime shift: more focus on pricing power, balance-sheet resilience, and real cash generation; less reliance on multiple expansion as the main engine of returns. If policy divergence is back, the currency market may end up doing the central banks’ work for them.
