Brent crude oil and European natural gas prices rose after the Iran war moved into further direct strikes on energy infrastructure. The combination of higher energy costs, a restrictive Federal Reserve and a tightening bias at other central banks has coincided with pressure on risk assets and support for the US Dollar. The Federal Open Market Committee kept rates unchanged in what was described as a hawkish hold. Fed funds futures reduced expected rate cuts over the next 12 months from -60bps before 27 February to -9bps.

Fed Outlook Shifts

The Fed repeated that uncertainty about the economic outlook remains elevated. Updated projections raised real GDP growth across the forecast period, and lifted both headline and core PCE inflation to 2.7% for 2026, with inflation projected to return to 2.0% by 2028. Dot plots continued to imply one rate cut in 2026 and one in 2027, with no change for 2028. The longer-term rate estimate rose to 3.125% from 3.0% in December. Jay Powell said policy is appropriate and that rates should remain mildly restrictive. He also stated that the possibility of the next move being a hike was discussed. With an energy shock in full swing and the Federal Reserve staying restrictive, we are seeing a clear move away from risk assets. The escalating conflict in Iran is pushing oil and gas prices higher, creating a tough combination for stocks and bonds. This environment strongly supports an upward trend for the U.S. Dollar in the coming weeks.

Trading Implications For Markets

We should look to position for continued dollar strength, as the market rapidly unwinds its bets on rate cuts. The Dollar Index (DXY) has already climbed to its highest level since the end of last year, a period in 2025 when rate cut expectations were still high. Buying call options on the dollar or put options on currencies like the Euro appears to be a sound strategy. The conflict’s direct impact on energy infrastructure makes betting on higher oil prices attractive. Brent crude has now surged past $115 a barrel, a significant jump from the steadier prices we saw through most of 2025. Using call options on oil-related ETFs can provide exposure to further price spikes as the geopolitical situation remains tense. For equity markets, this is a signal to anticipate further downside and volatility. The S&P 500 has already shed over 4% since the Fed’s hawkish announcement yesterday, and higher energy costs will continue to pressure corporate earnings. We should consider buying put options on major indices like the SPY or QQQ to protect against or profit from a continued sell-off. The Fed’s own projections and Powell’s commentary suggest a high bar for any policy easing. With the possibility of another rate hike even being mentioned, the path of least resistance for bond yields is higher, meaning prices will fall. This reinforces the case for betting against long-duration bonds, possibly through put options on an ETF like TLT. Given the sharp increase in uncertainty, we should also expect market volatility to remain elevated. The VIX index, a key measure of market fear, has jumped nearly 20% in the last week alone. Purchasing VIX call options could be a direct way to trade this rising anxiety in financial markets. Create your live VT Markets account and start trading now.

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