Risk Aversion Returns
US Treasury Secretary Scott Bessent said on Sunday that sometimes you have to escalate to de-escalate. Iran warned it would strike energy sites in the Middle East after Trump’s threat over power plants and the Strait of Hormuz. European Central Bank officials are due to speak later on Monday. The ECB kept interest rates unchanged at its policy meeting on Thursday and said the war in Iran has made the outlook “more uncertain”. The ECB said the conflict created “upside risks for inflation and downside risks for economic growth”. This led traders to increase bets on ECB rate rises later this year. We are seeing a familiar pattern of risk aversion emerge as we approach the end of the first quarter of 2026. The geopolitical tensions described in late 2025, which saw the EUR/USD pair drop to 1.1560, provide a valuable playbook for the coming weeks. With the pair currently trading near 1.1850 amid renewed diplomatic friction in the Middle East, we should anticipate similar safe-haven flows into the US Dollar.Options Strategies For Volatility
The key lesson from the 2025 Strait of Hormuz incident was the sharp spike in implied volatility. Traders should therefore consider buying volatility through derivatives rather than taking a simple directional bet. Using options like straddles or strangles on the EUR/USD allows a trader to profit from a large price swing, regardless of whether tensions escalate or suddenly resolve. Unlike in late 2025, when the European Central Bank was worried about upside risks to inflation, the current economic climate is different. February’s Eurozone HICP inflation data came in at a subdued 2.1%, a significant drop from the 4.5% peak seen during last year’s crisis. This makes the ECB less likely to talk about rate hikes now, potentially capping any rally in the Euro. We must also watch energy markets closely, as the 2025 events showed how quickly oil prices can react. Brent crude, which jumped 15% in a week during that period, is already trading above $95 a barrel on the latest satellite imagery of tanker movements. Call options on major oil ETFs could serve as an effective hedge against a similar upside shock that would weigh on European economic growth. Given that recent German industrial production data showed a 0.5% contraction last month, the Eurozone economy is more fragile now than it was in 2025. Therefore, put options on the EUR/USD offer a defined-risk way to position for downside. This strategy capitalizes on potential Euro weakness if the situation deteriorates, mirroring the flight to safety we saw last year. Create your live VT Markets account and start trading now.
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