The Bank of Canada kept its policy rate at 2.25% and removed guidance saying the current overnight rate is appropriate. The Bank’s statement referred to softer economic data since January. It said growth risks are tilted to the downside, while inflation risks are tilted to the upside. It also said it plans to look through higher near-term energy prices, but will not allow them to feed into persistent inflation.

Policy Risks Skew Toward Easing

TD Securities said near-term policy risks appear skewed towards easing. It added that a prolonged conflict in the Middle East could prompt a reassessment of the Bank’s stance. The report referred to the risk of stagflation and noted softer labour market momentum. It also stated that the Canadian dollar has lower sensitivity in risk-off moves versus non-USD peers, with support from oil links and terms of trade. TD Securities expects USD/CAD to move higher if the conflict persists. It cited rate and growth differences in favour of the US and an ongoing risk-off backdrop. Looking back at the Bank of Canada’s statement from 2025, we can see the foundation was laid for the policy divergence we are experiencing today. The bank’s removal of the phrase that its policy rate was “appropriate” signaled a dovish pivot that preceded the rate cuts later that year. This move correctly anticipated the economic slowdown that followed.

Implications For Rates And Fx Positioning

The stagflationary risks the BoC flagged then are now our primary concern. With the latest inflation data for February 2026 coming in at a sticky 2.9%, well above the bank’s target, further rate cuts seem unlikely in the short term. This is compounded by the most recent labour force survey showing job growth has stalled, with unemployment ticking up to 6.3%. For interest rate traders, this suggests the path of least resistance is a steeper yield curve. We should consider using options on BAX futures to position for the Bank of Canada being forced to hold its current 1.75% policy rate for longer than the market expects, even as growth stagnates. The front end of the curve appears anchored while the long end remains vulnerable to persistent inflation. The forecast for USDCAD to move higher in 2025 proved accurate, largely driven by the rate and growth differentials that still favour the U.S. today. With the Fed funds rate at 3.00% compared to the BoC’s 1.75%, the positive carry for holding US dollars remains significant. We should be using currency options to hedge against further Canadian dollar weakness or to position for a move toward 1.4000 in the coming months. The Middle East conflict mentioned last year did not escalate as feared, but it has contributed to a higher floor for oil prices, with WTI now consistently trading above $85 per barrel. This provides a modest tailwind for the loonie against non-USD peers, making short CAD positions against currencies like the Euro or Yen less attractive. This environment supports strategies using derivatives to bet on CAD outperformance on the crosses, even while it weakens against the dollar. Create your live VT Markets account and start trading now.

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USD/CAD gave back part of its earlier rise on Wednesday after the Bank of Canada (BoC) policy decision supported the Canadian Dollar. The move was limited as the US Dollar stayed firm ahead of the Federal Reserve rate decision due at 18:00 GMT. The pair traded near 1.3701 at the time of writing. The US Dollar Index (DXY) was near 99.85 after rebounding from two days of declines.

Bank Of Canada Signals

The BoC kept its benchmark rate unchanged at 2.25%, the same level in place since October. Governor Tiff Macklem said rates could rise if energy costs lead to persistent inflation, or fall if energy prices drop and the economy weakens. Macklem referred to uncertainty linked to US trade policy and geopolitical risks, and said the US-Israel war with Iran is pushing oil prices higher and could lift inflation in the near term. He said it is too early to judge the war’s effect on Canada’s growth, and noted higher oil prices could raise energy export income while also raising costs for consumers. Attention turns to the Fed, with rates expected to stay at 3.50%–3.75% for a second straight meeting. Markets are watching the SEP, dot plot, and Jerome Powell’s press conference. Looking back at the situation in 2025, the key difference today is that central bank paths are starting to converge. The wide interest rate gap between the Federal Reserve and the Bank of Canada (BoC), which defined much of last year, is narrowing. We must now position for a new environment where the BoC may be forced to act before the Fed. The BoC’s tough talk on inflation from 2025 has softened considerably due to recent data. Canada’s February 2026 inflation report showed CPI cooling to 2.9%, below the 3.1% that was widely expected and marking a significant drop from last year’s highs. This gives the BoC cover to consider rate cuts sooner rather than later to support a sluggish economy.

Geopolitics And Policy Divergence

The geopolitical risks from the US-Israel war with Iran, which once threatened to keep oil prices and inflation persistently high, have also stabilized for now. With WTI crude oil holding a range around $81 a barrel, the threat of a major energy price shock has subsided from the critical levels we saw in 2025. This removes a major hawkish argument for the BoC, allowing them to focus more on domestic growth. Conversely, the Federal Reserve now faces a more stubborn inflation picture than was anticipated late last year. The most recent US CPI data showed inflation holding firm at 3.2%, pushing back market expectations for the timing of the first rate cut. This pause from the Fed, while the BoC grows more dovish, creates a clear divergence that we can trade. Given this setup, we should consider strategies that benefit from a stronger US dollar relative to the Canadian dollar in the coming weeks. Buying USD/CAD call options with expiries in the next three to six months offers a defined-risk way to profit from this policy divergence. This position will gain value if the Fed is forced to hold rates steady while the BoC signals a clear intention to cut. Create your live VT Markets account and start trading now.

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ABN AMRO’s Larissa de Barros Fritz sets out how different oil and gas shocks can affect ECB rate expectations and German Bund yields. She separates demand-driven oil shocks, speculative inventory moves, oil supply disruptions, and gas supply shocks. Demand-driven oil shocks push rates sharply higher, while inventory-driven oil shocks can lead to flight-to-quality buying and lower yields. Oil supply shocks lift inflation and ECB expectations, but weaker growth can limit rises in longer-dated yields.

Gas Shocks And The Bund Curve

Gas supply shocks are described as more inflationary and longer lasting than oil shocks, leading to a growing “gas premium” in Bund yields over time. Bund yields may react only weakly, or fall slightly at first, because inflation passes through slowly, before rising in a sustained way at both short and long maturities. The note says current conditions point to an oil-led supply shock, with short-term bear-flattening. It then outlines the possibility of bear-steepening later as gas-related inflation builds. Given the recent supply disruptions that have pushed Brent crude above $95 a barrel for the first time since late 2025, we are clearly in an oil-led supply shock environment. This is already reflected in the latest February 2026 Eurozone HICP data, which showed an unexpected uptick in the energy component. The market is now pricing in a more hawkish European Central Bank in the immediate future. This dynamic strongly suggests a bear-flattening of the German Bund yield curve in the near term. We expect short-term yields to rise more sharply than long-term yields as the market digests immediate inflation risks, while growth concerns cap the long end. Derivative traders should consider establishing curve flattener positions, for instance by selling 2-year Bobl futures and buying 10-year Bund futures.

Positioning For A Later Regime Shift

However, we must remember the lessons from the 2022 energy crisis, where gas supply shocks created a more persistent inflation wave. Dutch TTF gas futures are already creeping up past €55/MWh, indicating that a secondary, gas-driven price shock could be slowly building. This “gas premium” has historically embedded itself into Bund yields with a time lag. Therefore, as this stickier gas-related inflation starts to filter through the economy over the next month or two, the yield curve dynamic is likely to shift. We should be prepared for a pivot towards a bear-steepening environment, where longer-term inflation fears start to outweigh short-term rate hike expectations. This would be the time to unwind flatteners and position for long-end yields to rise more quickly. Create your live VT Markets account and start trading now.

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ING’s Benjamin Schroeder expects the Federal Reserve to keep interest rates unchanged at the March FOMC meeting. Higher oil prices and elevated inflation expectations are described as limiting the case for rate cuts. Markets are positioned for no cut at this meeting, with the first reduction only fully priced by year-end. Markets also see growing chances of a cut starting in the summer.

Fed Holds Rates

Attention is expected on the Fed’s updated forecasts, including the Dot Plot of members’ rate expectations. In December, the Fed projected one rate cut in 2026 and a further 25bp cut in 2027. ING’s economists expect slightly lower growth forecasts and higher inflation projections. They also expect the Fed to shift the 2026 rate cut projection to 2027. The meeting may also cover balance sheet plans, as the temporary monthly US$40bn pace of reserve management purchases is expected to be reduced in April. The article notes a net US$130bn balance sheet expansion since mid-December and links it to the Fed funds effective rate. With the Federal Reserve meeting tonight, we expect rates to remain unchanged due to persistent inflation and rising energy costs. Recent data backs this up, with the February Consumer Price Index showing an unwelcome increase to 3.4%, interrupting the cooling trend we saw in late 2025. This sticky inflation gives the Fed very little room to consider easing policy at this moment. The bond market is already reflecting this reality, with the 10-year Treasury yield climbing back to 4.5%. This combination of higher borrowing costs and persistent inflation is not an environment that encourages rate cuts. Consequently, market pricing shows virtually no chance of a cut today, with the first full cut not anticipated until the end of the year.

Trading Implications

For derivative traders, this hawkish sentiment suggests positioning for yields to stay elevated in the short term. Selling short-dated puts on Treasury futures could be a viable strategy to earn premium, as a rate hold is widely expected. This trade benefits from the view that the Fed will not deliver a surprise dovish pivot. Looking further out, the focus will be on the Fed’s new forecasts, where we expect the timeline for rate cuts to be delayed. This situation feels very similar to the sentiment shift we witnessed back in 2024, when markets had to rapidly scale back their expectations for Fed easing. Calendar spreads in SOFR futures, which bet on a steeper yield curve over time, could be used to position for this delay. Given the uncertain environment, Fed Chair Powell will likely stress that the central bank has little conviction in its own long-term forecasts. This signals that volatility will remain a key theme. The MOVE Index, a measure of bond market volatility, has already risen over 15% since its lows last year, and strategies like buying straddles on bond ETFs could protect against sharp moves following future data releases. The recent surge in WTI crude oil to over $90 a barrel is a primary driver of these inflation fears. This energy price shock directly supports the case for a more cautious, “higher for longer” stance from the Fed. Traders should watch this space, as further gains in energy could be hedged with call options on major energy sector ETFs. Create your live VT Markets account and start trading now.

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US EIA data for 13 March showed US crude oil stocks rose by 6.156 million barrels. The market expectation was a rise of 0.4 million barrels. The reported increase was 5.756 million barrels above the forecast. The figures refer to the change in crude oil inventories for that week.

Bearish Inventory Surprise

This large build in crude oil inventories, coming in at over 6 million barrels against a tiny expected draw, is a clear bearish signal for oil prices. It suggests that supply is overwhelming demand in the market right now. For derivative traders, this points toward a period of price weakness. Given this unexpected surplus, we should anticipate increased downside volatility in the coming weeks. A primary strategy to consider is buying put options on WTI or Brent futures, which would profit from a drop in crude prices. The significant inventory build will likely drive up the premium on these puts as others also seek to hedge against or speculate on a downturn. This supply glut is happening as US refinery utilization rates have been soft, hovering around 87% according to the latest data, which is sluggish for this time of year. This indicates less crude is being converted into gasoline and other products. This trend suggests the inventory builds might continue if refineries don’t ramp up production for the spring season. On the demand side, recent reports show that US vehicle miles traveled in January 2026 saw their first year-over-year decline in nearly 18 months, falling by 0.6%. This softening in consumer fuel demand reinforces the bearish outlook. A combination of rising supply and weakening demand is a powerful catalyst for lower prices.

Defined Risk Income Strategy

For those expecting a more gradual decline or sideways price action, selling out-of-the-money call spreads could be an effective strategy. This approach allows traders to collect premium while defining their risk. The current market uncertainty makes this a potentially attractive alternative to outright shorting futures. We saw a similar pattern of consistent inventory builds back in the second half of 2024, which preceded a 15% price correction over the following two months. This historical context suggests that the market may be underestimating the potential for a sustained move lower. Traders should be positioned for weakness unless we see a surprise drawdown or a significant geopolitical event. Create your live VT Markets account and start trading now.

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RBC economists Rachel Battaglia and Abbey Xu report that Canadian cardholder spending rose modestly in February, while consumers kept cutting back on discretionary goods. Their core retail sales measure, based on a three-month average, stayed negative but improved compared with January. The core retail sales measure was -0.1% on a three-month average in February, compared with -0.3% in January on a seasonally adjusted basis. The easing followed weather-related disruption and post-holiday fatigue that weighed on spending in January.

Discretionary Goods Remain Under Pressure

The February contraction came entirely from discretionary goods, with clothing and related retail segments among the weakest. Spending growth in discretionary services and essentials partly offset this weakness in goods. Travel, entertainment and art recorded the strongest gains on a three-month average, pointing to firmer demand for experience-related categories. RBC expects higher oil prices to lift purchases at petrol stations, while effects on other essentials and discretionary spending may depend on household income allocation and savings use. Based on the February cardholder data, we see a market that is treading water rather than recovering strongly. The modest improvement in the three-month average retail spending, moving to -0.1% from -0.3%, suggests the worst of the winter slowdown may be over. This slight uptick points towards cautious optimism, but the underlying weakness in goods spending should temper any outright bullish bets. The key takeaway is the clear split between consumer preferences for experiences over physical items. While spending on discretionary goods like clothing continues to fall, categories like travel and entertainment are showing persistent strength. For instance, while retailers like Canadian Tire (CTC.A) might face headwinds, we could see continued momentum in stocks like Air Canada (AC), which recently beat earnings expectations on strong travel demand.

Trading Approaches By Sector

This divergence suggests that sector-specific strategies will outperform broad market plays in the coming weeks. We are looking at opportunities to buy calls or sell put spreads on resilient travel and service-oriented companies. Conversely, buying puts on non-essential goods retailers could be a prudent hedge against the ongoing consumer pullback in that area, a trend that has become more pronounced compared to what we saw in early 2025. Looking back to last year, the consumer was just beginning to grapple with the full effect of the 2024 interest rate holds. We saw a similar, though less defined, preference for services back in the first quarter of 2025. The data now confirms this is an entrenched behaviour, not a temporary fad, making it a more reliable basis for trading decisions. The wildcard is the recent surge in oil prices, with WTI now trading over $85 a barrel. This will boost revenues for energy producers and likely increase inflation, which currently hovers around 2.9% according to the latest Statistics Canada release. This creates uncertainty, as higher gas prices could either further dampen discretionary spending or be absorbed by consumers’ savings. Given this mixed picture, volatility plays on the S&P/TSX 60 index may be attractive. Options strategies like long straddles or strangles could prove profitable as the market digests the competing forces of resilient service spending and inflationary pressure from energy costs. This allows a trader to capitalize on a significant market move in either direction without having to predict which force will win out. Create your live VT Markets account and start trading now.

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Copper prices have come under pressure after exchange inventories rose sharply. LME copper stocks increased to their highest level since September 2019, helped by inflows into Taiwan and Baltimore. Total LME copper inventories rose by 18,775 tonnes to 330,375 tonnes. The rise in stocks points to softer physical demand. Inventories have moved higher this year amid weaker demand in China. Shipments to the US have also slowed as tariffs dampen trade. Speculative positioning has also weakened. Net bullish bets fell by 284 lots to 32,788 lots, the least bullish level since October 2023. We are seeing copper prices face significant headwinds due to a sharp increase in exchange inventories. Total LME stocks have now reached 330,375 tonnes, a level not seen since September 2019, which signals a clear surplus in the physical market. This build-up suggests traders should consider bearish strategies in the coming weeks. The inventory pile-up is largely driven by faltering demand from China, which consumes over half of the world’s copper. Recent data supports this, with China’s official manufacturing PMI for February 2026 coming in at 49.1, marking the fifth consecutive month of contraction and underscoring the ongoing weakness in its industrial and property sectors. This economic sluggishness means less copper is being pulled into the country, leaving more available on the global market. Beyond China, we are also observing reduced shipments to the United States as trade tariffs continue to slow the flow of industrial metals. The latest US ISM Manufacturing PMI registered at 47.8, indicating continued contraction in the factory sector and dampening the outlook for industrial demand. This combination of weakness in the world’s two largest economies creates a challenging environment for prices. We also note that speculative interest is waning, with net bullish positions falling to their lowest point since October 2023, suggesting conviction in higher prices is fading fast. As we saw looking back from our perspective in 2025, a similar dynamic of rising inventories throughout 2024 consistently capped price rallies and led to significant downward pressure. Derivative traders could therefore look at selling futures contracts or buying put options to position for potential further downside toward key support levels.

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EUR/GBP traded near 0.8638 on Wednesday after earlier losses. It stayed within a one-week range as traders waited for Bank of England and European Central Bank decisions due on Thursday. Eurozone inflation data supported the euro. Core HICP rose 0.8% month on month, and the annual core rate held at 2.4%, both in line with estimates.

Inflation And Oil Price Risks

Headline HICP increased 0.6% month on month, while the yearly rate stayed at 1.9%, as expected. With inflation near the ECB’s 2% target, higher oil prices linked to the US-Israel war with Iran may affect future policy choices. Higher energy costs also add risk to the Eurozone outlook due to reliance on imported energy. The ECB is expected to keep all three key interest rates unchanged, with attention on its guidance for the rate path. Before Middle East tensions, markets expected the ECB to stay on hold through 2026. Traders now price in the possibility of a rate rise by July. In the UK, market pricing has shifted away from near an 80% chance of a cut at this meeting. Markets now expect the Bank Rate to remain at 3.75%, and also price in a possible rise by year-end.

Shifting Central Bank Policy Divergence

Looking back to 2025, we recall how EUR/GBP was range-bound around 0.8638 due to uncertainty over central bank policies. Both the European Central Bank and the Bank of England were grappling with inflation risks fueled by elevated oil prices. That period of indecision now provides a clear contrast to the current situation. The Eurozone’s economic picture has shifted significantly since then. Core inflation has now fallen to 2.1% as of February 2026, a notable drop from the 2.4% rate that concerned policymakers last year. With recent economic sentiment indicators also pointing towards a slowdown, we are seeing markets price in at least two ECB rate cuts before the end of this year. Meanwhile, the UK continues to face more stubborn inflation, which registered at 2.8% in the latest official reading. The Bank of England has signaled it is in no rush to lower its 4.25% Bank Rate, especially with wage growth remaining persistently high. This policy divergence between a dovish ECB and a steady BoE is the key theme for the coming weeks. For derivative traders, this growing policy gap points towards further downside for the EUR/GBP pair. Strategies that profit from a weakening Euro relative to the Pound should be favored. We believe that options traders should consider buying EUR/GBP puts with expirations in the second quarter to position for this move. The pair is already reflecting this divergence, having trended down from the 0.86 levels seen last year to around 0.8550 today. Given the fundamental drivers, we anticipate a test of the 0.8450 support level in the coming months. Therefore, establishing bearish positions now, while volatility remains relatively contained, presents a compelling opportunity. Create your live VT Markets account and start trading now.

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Qatar’s foreign ministry said on Wednesday that Iran’s South Pars gas field is an extension of Qatar’s North Field, according to Reuters. The ministry described Israeli targeting of facilities linked to South Pars amid ongoing regional military escalation. Iran’s state television reported that US and Israeli airstrikes hit the South Pars natural gas field and related infrastructure earlier in the day. Qatar’s foreign ministry said attacks on energy infrastructure pose a threat to global energy security, people in the region, and the environment.

Calls For Restraint And Deescalation

The ministry called on all parties to show restraint, follow international law, and pursue de-escalation to maintain regional security and stability. Oil prices rose from daily lows, with West Texas Intermediate (WTI) trading near $97, up about 3% on the day. The immediate spike in WTI crude to near $97 a barrel signals that the market is pricing in a significant risk of supply disruption. We are seeing implied volatility in crude options, as measured by the OVX index, surge over 25% to a reading of 48, reflecting deep uncertainty. Traders should prioritize strategies that benefit from this volatility, such as buying call or put options, to capture large price swings while limiting downside risk. Given the attack targeted the South Pars gas field, the direct link to Qatar’s North Field makes the global LNG market extremely vulnerable. European TTF natural gas futures have already climbed 12% to €45 per megawatt-hour on fears that future LNG cargoes could be threatened. We believe derivative plays on natural gas benchmarks now carry a higher and more unpredictable risk premium than even crude oil. Looking back at the fourth quarter of 2025, we saw a similar geopolitical flare-up in the Strait of Hormuz drive a 15% increase in Brent prices over two weeks before fading. This history suggests that while the initial reaction is strong, a sustained rally is not guaranteed, making bull call spreads a prudent way to bet on further upside while capping the cost. The key is to be positioned for sharp, two-way price action as official statements either escalate or de-escalate the situation.

Broader Market Spillovers

We must also monitor the wider market impact beyond energy itself. Expect the CBOE Volatility Index (VIX), currently trading around 16, to push back above the 20 level as equity traders begin to sell first and ask questions later. This type of event typically strengthens the US dollar as capital flows toward perceived safe-haven assets. Create your live VT Markets account and start trading now.

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EUR/JPY traded near 183.50 on Wednesday and was little changed. Trading was cautious ahead of the European Central Bank (ECB) and Bank of Japan (BoJ) policy decisions due on Thursday. Eurozone inflation data showed an uptick in February. The HICP rose 0.6% month on month after a 0.6% fall in January, and was slightly below initial estimates.

Eurozone Inflation And Policy Focus

Annual HICP inflation was 1.9%, up from 1.7% in January, a 16-month low. Core inflation rose 0.8% month on month and was 2.4% year on year. The ECB is expected to keep its deposit rate at 2%. Interest rate futures price in a rise by July and a chance of another move by year-end, while many economists expect a longer pause. The BoJ is expected to hold its benchmark rate at 0.75%. Japan’s inflation pressures have been linked to higher energy prices tied to Middle East tensions, alongside reliance on energy imports. Markets are pricing in a possible BoJ rate rise as early as April. EUR/JPY remained in a short-term consolidation as the ECB and BoJ outlooks kept direction limited.

From Consolidation To A New Regime

Looking back to this time in 2025, we were analyzing a tight range in EUR/JPY as the European Central Bank held its rate at 2% and the Bank of Japan stood at 0.75%. The market was cautious, anticipating future moves but stuck in consolidation around the 183.50 level. That period of quiet expectation has now passed. The landscape has shifted significantly, as the European Central Bank’s deposit rate now stands at 3.25% after hikes through late 2025 proved necessary to curb persistent price pressures. The latest Eurostat flash estimate shows headline HICP inflation at 2.5% for February 2026, which is keeping the central bank from signaling any pivot toward rate cuts. This sustained higher rate environment continues to provide underlying support for the euro. Similarly, the Bank of Japan’s normalization path, which was only a prospect then, has materialized with the policy rate now at 1.0%. Following the spring 2026 “shunto” wage negotiations that secured an average pay increase of over 4.5%, Tokyo Core CPI for February registered at 2.2%. The BoJ is no longer just hawkish in tone but in action, creating two-way risk for the yen. With both central banks now actively managing policy off their emergency-era lows, implied volatility has risen substantially from the levels seen in early 2025. Traders should consider buying volatility through derivatives, as unexpected data from either region could spark sharp moves. Long straddles on EUR/JPY, which profit from a large price swing in either direction, could prove effective in capturing a breakout from the current 192.00-196.00 range. The interest rate differential, while still wide, is now more dynamic than the static situation we observed last year. Instead of simply holding a long carry trade position, traders should use forward rate agreements to speculate on the evolving gap between ECB and BoJ policy paths. This allows for a more nuanced position on whether the pace of future BoJ hikes will outmatch the ECB’s ability to hold rates high. Create your live VT Markets account and start trading now.

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