The ECB kept rates unchanged at its March meeting, with the main refinancing rate at 2.15%, the marginal lending facility at 2.4%, and the deposit facility at 2%. Lagarde said the decision was unanimous, and noted that short-term rates have risen. Lagarde said war is disrupting commodity markets and weighing on confidence, and that the war in the Middle East has tightened financial conditions. She said risks to growth are tilted to the downside, while risks to inflation are tilted to the upside in the near term.

Inflation Outlook And Policy Signals

She said energy prices are expected to push inflation above 2% in the near term, while indicators of underlying inflation remain consistent with the 2% target. She also said corporate profits recovered, labour costs rose, and wage indicators point to continued moderation. The ECB said staff projections include information up to 11 March and that inflation projections were revised up versus December, especially for 2026. Inflation excluding energy and food is projected at 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028; growth is projected at 0.9% in 2026, 1.3% in 2027, and 1.4% in 2028. The ECB said it will remain data-dependent and decide meeting by meeting, without pre-committing to a rate path, while APP and PEPP portfolios decline as maturing proceeds are not reinvested. After the decision, EUR/USD was up 0.45% at 1.1500. Given the European Central Bank is holding rates steady but acknowledging significant uncertainty, the primary focus for us is on market volatility. The war in the Middle East has created two distinct possibilities: a short conflict that boosts the economy or a prolonged one that crushes it. This binary outcome makes options strategies, which profit from large price swings, particularly attractive right now.

Positioning For Volatility

We have seen the VSTOXX index, a measure of volatility for the Euro Stoxx 50, climb by over 30% in the last month to trade above 24, a level we last saw during the market jitters of late 2024. This signals that traders are bracing for sharp moves in European equities. Buying straddles or strangles on major indices allows for a position that profits whether the market rallies on peace news or sells off on escalating conflict. For interest rates, while the ECB is on hold, the risk is clearly skewed towards a hawkish surprise if energy prices continue to push inflation higher. Forward rate agreements are now pricing in a full 25 basis point hike by the end of the third quarter, a sharp repricing from just two weeks ago. We can use options on EURIBOR futures to position for a faster-than-expected policy tightening if inflation data for March and April shows energy costs feeding through to core prices. The EUR/USD is caught between a risk-averse environment favouring the dollar and a potentially hawkish ECB. However, with the Federal Reserve also holding a firm line, the dollar’s safe-haven status is likely to dominate in the near term. We see traders using put options to protect against a drop below the 1.1411 support level, a critical line from earlier this month. The core of this entire situation is the price of oil, which we’ve seen jump 15% to over $110 per barrel since the conflict began, according to data from ICE Futures Europe. Looking back at the 2022 energy crisis, we remember how quickly energy shocks can force central banks to act, even at the risk of a recession. Therefore, using call options on Brent crude futures is a direct way to speculate on the “severe scenario” the ECB is now actively modelling. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account