Key Pmi Highlights
In the US, the Composite PMI fell to 51.4 from 51.9 and the Services PMI dropped to 51.1 from 51.7, both at an 11-month low. Manufacturing PMI rose to 52.4 from 51.6. In the Eurozone, the Composite PMI declined to 50.5 from 51.9, a 10-month low, while Services PMI eased to 50.1 from 51.9. Manufacturing PMI increased to 51.4 from 50.8, the highest level in nearly four years. Markets have shifted rate expectations amid Middle East tensions, with the Fed now expected to hold rates through 2026. Two ECB rate rises are fully priced in, and ECB’s Martins Kazaks said rises may be needed if inflation spreads from energy. We remember seeing those PMI reports back in late 2025, which signaled trouble for both the US and Europe. The data pointed to a clear risk of stagflation, especially with the conflict in the Middle East causing energy prices to spike. This was the moment the outlook for central banks began to change dramatically.Central Bank Divergence
The market’s forecast for central bank divergence proved correct, with the European Central Bank hiking rates twice since then, bringing its main rate to 5.00%. Meanwhile, the Federal Reserve has held firm, keeping its benchmark rate steady in the 5.25-5.50% range. This policy split has been the primary driver for the euro’s strength, pushing the EUR/USD from below 1.16 to its current level around 1.1850. Given this backdrop, options strategies that benefit from a continued, but perhaps slowing, rise in EUR/USD seem prudent. We’ve seen implied volatility in the pair increase from around 6% in mid-2025 to over 9% by January 2026, and it remains elevated. Selling out-of-the-money puts on the euro could be a way to collect premium, assuming the ECB’s hawkish stance provides a floor for the currency. Looking ahead, the key is to watch inflation data on both sides of the Atlantic. Recent Eurozone HICP inflation cooled slightly to 3.8% in February, which might make the ECB hesitant to signal more hikes. Any hint from Fed officials that they are becoming concerned about the strong dollar could also quickly reverse the trend. The interest rate differential between Europe and the US has narrowed significantly, which continues to support the euro. Traders should consider using futures to express a view on the direction of this spread itself. This allows for a more direct play on monetary policy divergence without being fully exposed to the spot currency’s daily noise. Create your live VT Markets account and start trading now.
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