Market Risk Sentiment
The Euro also faced pressure from higher oil prices linked to the Iran conflict. Energy prices rose after the US and Israel struck several Iranian oil depots over the weekend. Higher global petrol prices raised concerns about stronger consumer inflation expectations in the Eurozone. This could reduce household spending power. Eurozone inflation had already picked up faster than expected in February. Preliminary headline HICP was 1.9% year-on-year, while core HICP was 2.4% year-on-year. In the US, attention turns to February CPI data due on Wednesday. The release is expected to affect expectations for the Federal Reserve’s policy outlook.Positioning And Volatility
We remember this time last year, in early 2025, when the intensified conflict in the Middle East sent a shock through the markets. The resulting flight to safety pushed the US Dollar Index towards 99.50 while EUR/USD fell to the 1.1550 level. That period showed us how quickly geopolitical risk can become the market’s main driver. The Euro has struggled since that 2025 shock, with the pair currently trading near 1.0700 as of this morning. Persistent energy security concerns and slower European growth have weighed on the currency for the past twelve months. Consequently, we see the Dollar Index holding firm around 104.50, well above the levels seen during that initial conflict spike. Implied volatility in major currency pairs, particularly EUR/USD, is elevated, with 1-month vol ticking up to 9.5% last week. This is a significant jump from the 6% average we saw in late 2024, just before the conflict began. Given this environment, traders should consider buying volatility through strategies like long straddles or strangles to profit from large price swings, regardless of direction. The surge in oil prices during the 2025 depot strikes has left Brent crude futures in a structurally higher range, currently trading near $95 a barrel. While the acute supply shock has passed, the risk premium remains firmly in place. We believe using call options on crude futures offers a defined-risk way to position for any further supply disruptions in the coming weeks. We saw how the energy spike in February 2025 pushed Eurozone core HICP to 2.4%, and that inflationary impulse has proven sticky, with last month’s reading coming in at 2.8%. The market is now pricing out aggressive rate cuts from the European Central Bank that were expected for the second half of this year. Therefore, paying fixed on short-term interest rate swaps could be a prudent way to position for a more hawkish ECB outlook. Create your live VT Markets account and start trading now.
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