ECB Governing Council member Olli Rehn said damage to energy production infrastructure in the Middle East could have lasting effects after the most intense phase of the conflict. He said repair and rebuilding work may continue long after the acute phase ends.
Rehn said a rise in headline inflation this year appears unavoidable, but the medium-term impact is uncertain. He said this uncertainty makes it difficult to assess the future path of inflation in the eurozone.
Policy Path Remains Uncertain
He reiterated that interest rate decisions are not pre-set and said the ECB remains data-dependent when setting policy. He also said the conflict points to the strategic importance of Europe’s green transition, and warned against slowing it.
Rehn’s remarks had little immediate effect on the foreign exchange market. EUR/USD rose for a seventh straight day, up 0.17% on Tuesday, trading around 1.1780.
With recent damage to Middle East energy infrastructure, we expect a rise in headline inflation this year. Brent crude has been volatile, spiking above $110 a barrel last month and now consolidating around $105, making call options on energy futures a direct way to position for further supply shocks. This creates an immediate focus on price pressures that will likely persist for weeks.
The European Central Bank will remain data-dependent, meaning its interest rate decisions are not set in stone. We have already seen Eurozone inflation for March 2026 tick up to 2.9%, breaking a downward trend, and the market is now pricing in a nearly 70% chance of a rate hike by July. This suggests traders should consider buying puts on short-term interest rate futures to hedge against a more aggressive central bank response than was expected at the end of 2025.
Volatility Strategies For Traders
This level of uncertainty around both energy prices and monetary policy creates a perfect setup for volatility. We saw a similar dynamic back in 2022, when unpredictable energy markets led to sharp swings in asset prices. Buying straddles or strangles on major currency pairs or equity indices ahead of key inflation reports could prove profitable, regardless of which direction the market breaks.
The euro’s ongoing strength, now pushing towards 1.1780, indicates the market believes the ECB may have to tighten policy more than the US Federal Reserve. This view is supported by recent softer inflation data out of the United States. Therefore, using bullish but risk-defined strategies, like call spreads on the EUR/USD, allows traders to ride this momentum while protecting against a sudden reversal.
