EM FX carry trades have stayed resilient despite the Middle East conflict. Among 12 high-yielding EM currencies with enough data, only INR and RON are now classed as underheld. Real rates are presented as the main support for carry performance. Inflation is expected to rise globally, while many EM central banks are expected to avoid aggressive easing during a supply shock due to recent policy credibility. Another factor is possible resistance from the Federal Reserve on rate cuts. Bank Indonesia’s Tuesday decision is cited, with IDR described as most at risk of joining INR and RON in underheld territory. Bank Indonesia framed its decision around “strengthening external resilience”. It referred to exchange-rate stabilisation via intervention and attracting foreign portfolio investment as policy anchors. Most EM central banks are expected to take a similar approach, and most high-yielding currencies remain net bought. TRY is facing the strongest selling pressure despite very high nominal rates, linked to fiscal concerns and the cost of subsidies if the conflict continues. The piece also notes limited market tolerance for large-scale energy price intervention. It links this to austerity or rationing measures across emerging and frontier economies. The resilience in Emerging Market FX carry trades is something we should continue to trust for now. The key factor is the strong real interest rates offered by these economies. While global inflation is ticking up, with the latest US CPI coming in at 3.4%, most EM central banks have built enough credibility to hold rates high. This situation is reinforced by the Federal Reserve’s reluctance to cut rates, with markets now pricing the first cut for September 2026 at the earliest. We saw this pressure play out last year in 2025, where EM currencies only stabilized after it became clear the Fed was on a prolonged pause. This forces EM central banks to maintain high rates to prevent capital from flowing out and weakening their currencies. Therefore, most high-yielding currencies remain a net buy, with the Mexican Peso being a prime example, offering a real rate over 6% with its policy rate at 11.00%. However, we should be cautious with the Indian Rupee and Romanian Leu, which are already seeing net outflows. The Indonesian Rupiah is also showing weakness, as its trade surplus narrowed to just $0.87 billion in January 2026, making it vulnerable to joining the underheld group. The Turkish Lira is the one to actively bet against, despite its very high nominal interest rates. The recent government decision to expand energy subsidies, which could widen the budget deficit by another 1.5% of GDP, is spooking the market. This signals that fiscal worries are overriding monetary policy, making further depreciation likely. For derivative plays, this suggests selling TRY call options or buying forward points to short the currency. At the same time, we can maintain long positions in currencies like the Mexican Peso or Brazilian Real against lower-yielding funding currencies. We remember the sharp EM sell-off in Q3 2025, so using options to define risk on these long carry positions remains a prudent strategy.

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TD Securities expects UK labour conditions to ease further, with employment falling and unemployment rising. It forecasts the jobless rate at 5.3%, matching its COVID peak. The firm projects the three-month change in employment at -20k, versus a market forecast of 14k and a prior reading of 52k. It expects unemployment at 5.3%, compared with the market at 5.2% and the prior at 5.2%.

Wage Growth Outlook

Wage growth is forecast to cool but remain high across measures. Headline average weekly earnings are seen at 3.8% (3m/y), versus the market at 3.9% and prior at 4.2%. Average weekly earnings excluding bonuses are projected at 4.0% (3m/y), matching the market and down from 4.2% previously. Private earnings excluding bonuses are forecast at 3.5% (3m/y), in line with the market and up from 3.4%. The note links weaker labour readings with conditions that have supported Bank of England policy easing in the past. It adds that near-term attention may turn to inflation effects tied to the Iran conflict rather than UK data alone. Last year, in 2025, we were watching for the UK labour market to loosen significantly, with unemployment expected to hit its COVID-era peak of 5.3%. This outlook was based on the idea that a weaker jobs market would support the Bank of England easing its policy. The situation has since evolved, providing a clearer path for traders.

Market Implications For Traders

That severe loosening never fully happened, as the latest Office for National Statistics data shows UK unemployment holding at a more resilient 4.5% in the three months to January 2026. This strength has given the Bank of England justification to hold rates steady so far this year. It suggests the underlying economy is stronger than was anticipated back in 2025. Wage growth, however, has remained elevated as predicted, with average weekly earnings ex-bonuses currently at 3.9%. This stickiness, combined with a core inflation rate that is still hovering around 2.8%, explains the central bank’s ongoing caution. The geopolitical inflation fears from the Iran conflict that were a focus in 2025 have thankfully not led to a sustained energy price shock. For derivatives traders, this means the case for imminent and deep rate cuts has weakened. We see an opportunity in fading the market’s more dovish expectations for the Bank of England’s summer meetings. Positioning through SONIA futures to reflect a later start to the easing cycle, perhaps in Q3 2026 rather than May, is a logical response. Volatility in sterling assets remains a key theme, meaning option strategies are attractive. Given the resilience of the labour market against still-high wage pressures, the risk of a policy mistake from the Bank is non-trivial. We believe buying straddles on the FTSE 100 could be an effective way to position for a potential spike in volatility around future MPC meetings. Create your live VT Markets account and start trading now.

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US producer prices rose 3.4% in February from a year earlier, according to the Bureau of Labour Statistics. This was above the 2.9% estimate and higher than the previous month’s 2.9% rise. Core producer prices, which exclude food and energy, increased 3.9% year on year. This was above the 3.7% forecast and up from 3.5% previously, after that earlier figure was revised from 3.6%.

Monthly Changes And Immediate Market Reaction

On a monthly basis, headline PPI rose 0.7%. Core PPI increased 0.5%. After the data release, the US Dollar Index (DXY) moved higher. It reached around 99.80, near daily highs. We saw this exact situation unfold around this time in 2025, when producer prices unexpectedly jumped and sent the dollar surging. That print showed a 3.4% annual gain, catching many off guard who were positioned for inflation to cool down. The memory of that sharp market reaction should guide our thinking for the upcoming data release. The Federal Reserve has held interest rates firm at 5.50% for the past six months, emphasizing it will remain data-dependent. After January’s Consumer Price Index came in at a sticky 3.1%, the market is on edge, fearing a repeat of last year’s inflationary surprise. This makes the upcoming February producer price data a critical event for near-term market direction.

Volatility And Positioning Ahead Of The Next Print

Expectations are currently centered around a 2.8% annual rise for the next PPI report, but we must be prepared for another upside shock. Given the pattern from 2025, any number above 3% could trigger a significant repricing of rate-cut expectations. This uncertainty is why the VIX, the market’s fear gauge, has crept back up above 16 this month. Derivative traders should consider buying volatility ahead of the announcement. Options pricing on interest-rate-sensitive instruments like Treasury bond ETFs shows increased demand for protection against a large move. Establishing long straddles or strangles could prove profitable regardless of the direction, capitalizing on the spike in volatility itself. For those with a directional view, last year’s playbook suggests a hotter-than-expected number would strengthen the dollar and weaken equities. We could look at call options on the US Dollar Index (DXY) or put options on the Nasdaq 100. Remember how quickly the DXY shot to the 99.80 region following the data in 2025. Conversely, hedging existing long positions is now paramount. If you are holding equities, buying short-dated put options on the S&P 500 can provide a cost-effective cushion against a market drop. The risk is that inflation is once again more persistent than the market is currently pricing in. Create your live VT Markets account and start trading now.

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ABN AMRO economist Rogier Quaedvlieg describes the energy shock linked to the closure of the Strait of Hormuz as a cost-push shock that lifts US inflation while weakening growth. The bank expects the Federal Reserve to keep interest rates unchanged for an extended period while it assesses demand and inflation expectations. The report notes that inflation has not returned to target since the post-pandemic surge, and that household inflation expectations are volatile, while market pricing remains anchored. It says this could argue for tighter policy, but also leaves scope for a limited or no immediate change in rates.

Market Reaction And Fed Constraints

It adds that higher energy prices have already tightened financial conditions, with equities falling and the US dollar strengthening. It says further Fed tightening could add to these effects, reduce asset values, and curb consumption among higher-income households. Markets have priced in about a 0.9 percentage point rise in inflation since the first attack on Iran, while long-term inflation expectations have shown little change and remain near the lower end of the past two years’ range. The piece says the conflict is not expected to affect the next Fed meetings, where rates were already set to stay at current levels. A correction on 18 March at 12:47 GMT states Quaedvlieg works at ABN AMRO Bank, not ING. The article says it was produced with help from an AI tool and reviewed by an editor. The recent energy shock from the Strait of Hormuz closure presents a classic cost-push dilemma, boosting inflation while hurting growth. We’ve seen WTI crude futures surge over 25% in the last month, pushing last week’s February CPI to a worrying 3.8%. This puts the Federal Reserve in a difficult position, strengthening the case for keeping interest rates on hold for an extended period.

Implications For Traders And Volatility

We believe the Fed can get away with a limited response, or none at all, because the market is already doing the tightening for them. The S&P 500 has dropped nearly 8% since the conflict began, and a flight to safety has pushed the Dollar Index to a six-month high around 106.50. Further rate hikes could unnecessarily worsen these conditions and hit consumer spending, which is already showing weakness with the recent 0.6% fall in retail sales. The key will be watching inflation expectations, which the Fed fears could become unanchored. However, long-term market gauges remain stable, with the 5-year, 5-year forward inflation expectation rate holding near 2.3%, suggesting the market sees this spike as temporary. This gives the central bank cover to look through the immediate jump in headline inflation and wait for more data. From our perspective in 2026, we remember the Fed’s aggressive campaign against the demand-driven inflation of 2022 and 2023. This current situation is fundamentally different as it stems from a supply shock, making a hawkish response far riskier to the underlying economy. The 1970s showed us how trying to fight an oil shock with high rates can lead to severe recession. For derivative traders, this signals that rate-hike probabilities priced into the front end of the curve are likely too high. The Fed Funds futures market is implying a roughly 40% chance of a 25 basis point hike by the June meeting, which seems excessive given the growth risks. This suggests opportunities in selling out-of-the-money calls or constructing put spreads on SOFR futures to bet against a hawkish policy error. Volatility in interest rate markets, reflected in the MOVE index, has also spiked to levels not seen since last year. If the Fed successfully signals a patient, wait-and-see approach at its next meeting, this volatility is poised to decline. Short-volatility positions could become attractive as the market digests that the central bank is not on autopilot to hike. Create your live VT Markets account and start trading now.

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The US Producer Price Index excluding food and energy rose by 0.5% month on month in February. This was above the forecast of 0.3%. The data point shows stronger-than-expected monthly growth in producer prices when volatile food and energy items are removed. It compares the actual 0.5% reading with the 0.3% expectation.

Implications For Fed Policy

This higher-than-expected 0.5% core PPI reading is a clear signal that wholesale inflation is not cooling as we had hoped. This directly challenges the narrative that the Federal Reserve would be in a position to cut rates by mid-year. Consequently, we are seeing the derivatives market aggressively reprice the odds of a June rate cut, with probabilities for a cut now falling below 25% from over 70% just last month. This report confirms a worrying trend, as it follows last week’s Consumer Price Index data which showed core inflation stuck at a stubborn 3.9% year-over-year. The consistency between producer and consumer prices suggests inflationary pressures are becoming more embedded than the market anticipated. This strengthens the case for the Fed to maintain its “higher for longer” stance well into the second half of the year. For those trading interest rate futures, this is a signal to reduce exposure to positions betting on imminent rate cuts. We anticipate the two-year Treasury yield, highly sensitive to Fed policy, will test its recent highs around 4.85% in the coming weeks. Options strategies that benefit from stagnant or rising short-term rates, such as selling calls on SOFR futures, are becoming more attractive. In the equity options space, we expect to see an uptick in demand for protective puts on major indices like the S&P 500 and the Nasdaq 100. Persistent inflation threatens corporate profit margins, a hard lesson we relearned during the sharp market pullbacks in 2025 when similar inflation surprises occurred. A sustained move in the VIX index back above the 17 level now seems increasingly plausible.

Historical Parallels And Risk

This situation feels very similar to what we experienced in early 2023, when initial optimism for a Fed pivot was repeatedly crushed by unexpectedly strong economic data. Back then, markets that got ahead of the Fed saw significant corrections. We must be cautious of that same pattern repeating, where the market’s hope for easier policy outpaces the reality of the inflation numbers. Create your live VT Markets account and start trading now.

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The United States Producer Price Index (year-on-year) was 3.4% in February. This was higher than the expected 2.9%. The data shows producer prices rose faster than forecast. The difference between the actual and expected rate was 0.5 percentage points.

Inflation Proving Stickier Than Expected

The higher-than-expected producer price index suggests inflation is proving stickier than anticipated. We are seeing markets quickly reprice the odds of a Federal Reserve rate cut, with the chances for a June 2026 reduction now falling below 50% according to CME FedWatch data. This marks a significant shift from just a week ago when a summer cut was almost fully priced in. In response, we should look at interest rate futures to position for a more hawkish Fed. Shorting December 2026 SOFR futures could be a direct way to express the view that rates will remain elevated for longer than the market previously thought. This strategy benefits if the Fed holds rates steady or delays its easing cycle through the year. This persistent inflation is a headwind for equities, so we should consider protective put options on major indices like the S&P 500. The VIX has already jumped over 15% to 17.5 on this news, indicating rising fear and demand for portfolio insurance. Buying puts or establishing put spreads allows for downside protection against a potential market correction. A hawkish Federal Reserve relative to other central banks should translate into a stronger U.S. dollar. We believe going long the U.S. Dollar Index (DXY) through futures or call options is a sensible trade. This is especially true when we recall the dollar’s strength throughout 2025 when rate differentials were the primary market driver.

Recent Data Undermining The Disinflation Narrative

This PPI report isn’t an isolated event, as it follows a slightly hotter-than-expected CPI reading last week which registered at 3.1%. Looking back, the market narrative in late 2025 was built on the assumption of a steady decline in inflation, paving the way for rate cuts. This recent data now seriously challenges that entire thesis. Create your live VT Markets account and start trading now.

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The US Producer Price Index (month-on-month) rose by 0.7% in February. The expected figure was 0.3%. The reported increase was 0.4 percentage points above expectations. The release indicates producer prices rose faster than forecast during the month.

Persistent Inflation Signal

The recent Producer Price Index data is a clear signal that inflation remains persistent. This higher-than-expected wholesale inflation will likely pass through to consumer prices, keeping pressure on the Federal Reserve. We should now expect the Fed to maintain its hawkish stance for longer than the market previously anticipated. Market expectations for interest rate cuts need to be adjusted immediately. Following the data, Fed funds futures have priced out the possibility of a May 2026 rate cut, with the probability of a June cut falling from over 70% to now below 40%. This recalibration suggests positioning for a “higher for longer” rate environment in the coming weeks. We saw how sensitive equity markets were to inflation surprises throughout 2024 and 2025, and this time will be no different. Derivative traders should consider protective put options on major indices like the S&P 500 and the tech-heavy Nasdaq 100. These positions can hedge against a potential market downturn as borrowing costs are expected to remain elevated. This inflation surprise will likely jolt markets out of their recent complacency, leading to increased price swings. The Volatility Index (VIX), which was trading near a low of 14, has already begun to climb. Buying VIX call options or futures could be an effective way to profit from the expected rise in market uncertainty. A more hawkish Fed stance typically strengthens the U.S. dollar as higher rates attract foreign capital. The Dollar Index (DXY) has already surged to 104.5, a three-month high, reflecting this sentiment. We should look at long positions on the dollar against currencies with more dovish central banks, such as the euro or yen.

Rates And Dollar Implications

In the fixed-income market, this data is bearish for bond prices. The 2-year Treasury yield, which is highly sensitive to Fed policy expectations, has already jumped 15 basis points to 4.75%. Traders should consider strategies that benefit from rising yields, such as shorting Treasury note futures. Create your live VT Markets account and start trading now.

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Japanese officials have increased verbal warnings as the yen weakens towards 160 per US dollar. The move follows comments about speculative trading and higher living costs linked to a weaker currency. Finance Minister Satsuki Katayama described the yen’s recent fall as speculative and not based on economic fundamentals. She said there is urgency and that authorities are ready to take bold measures to limit excess volatility.

Markets Watch For Possible Action

Markets are watching for possible Ministry of Finance action if the warnings do not steady the exchange rate. Attention is also on the Bank of Japan policy meeting and Prime Minister Sanae Takaichi’s visit to Washington later this week. USD/JPY is holding near 159 after reaching a yearly high of 159.75 last Friday. Traders are watching trendline support at 158.80 for a sustained break, which would be needed before considering any pullback from the rise that began at 152.25 on 12 February. The article was produced with the help of an AI tool and reviewed by an editor. With Japanese officials talking tough as the dollar pushes toward 160 yen, we should be preparing for a spike in currency volatility. The strong language about bold measures suggests a high probability of direct market action, creating a risky environment for anyone holding unhedged positions. This makes buying options to bet on price swings more attractive than placing simple directional trades.

Intervention Risk And Key Levels

We should remember the sharp market reaction during the interventions back in the spring of 2024. At that time, Japanese authorities spent a record 9.8 trillion yen when the dollar broke above 160, causing the pair to fall several yen in a matter of hours. This historical precedent shows they are not bluffing and have the capacity to trigger a very rapid reversal. Fundamentally, the big gap in interest rates between the U.S. Federal Reserve, at over 5%, and the Bank of Japan, near 0.1%, continues to support a strong dollar. This underlying pressure means any intervention-driven yen strength might be a temporary, albeit sharp, selling opportunity for the dollar. For this reason, traders will be watching closely to see if any dip finds buyers quickly. Current market positioning validates the government’s concern over speculation, as recent data from last week showed speculative net short positions against the yen were still near multi-year highs. This large number of traders betting against the yen means any intervention could trigger a massive short squeeze, accelerating the dollar’s fall. The risk of being on the wrong side of such a move is now extremely elevated. The key level to watch is the 158.80 trendline support. A sustained break below this point following an intervention would signal a deeper correction, making USD/JPY put options a viable strategy. Ahead of the Bank of Japan meeting, holding long yen call options could serve as a cheap way to profit from a surprise government action. Create your live VT Markets account and start trading now.

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Societe Generale expects a mildly restrictive Federal Reserve stance and possible hawkish changes to the Summary of Economic Projections (SEP) to support the US dollar versus G10 and emerging market currencies. It places the current US upper policy rate at 3.75% and notes the US is less exposed to an oil supply shock as an energy exporter. The bank says the Fed’s dual mandate keeps attention on inflation and jobs, and it sees the median 2026 dot plot still implying one rate cut in its base case. It also flags a 4-sigma spike in oil prices as a factor the Fed may need to assess.

Dollar Support From A Restrictive Fed

It reports that Miran and Waller are likely to dissent again and prefer a rate cut, and it says the dollar could react if either withdraws a dovish position. It expects Chair Powell’s press conference to stay close to prior messaging, with policy seen as appropriate and future cuts depending on further labour market weakness. It identifies an “outside risk” that the 2026 PCE inflation forecast could be revised up from 2.4%, leading the FOMC to remove the single projected cut. It says this could lift USD/G10 and USD/EM and shift the Treasury curve from bull flattening to bear flattening. It adds that Jan Groen has revised his forecast to no change in 2026 and two cuts in 2027 due to a higher inflation path. The article notes it was produced with AI assistance and reviewed by an editor. The Federal Reserve’s current policy rate is seen as mildly restrictive, which should continue to support the US Dollar. With the Dollar Index holding firm around 105.50, the path of least resistance appears to be higher. This environment favors strategies positioned for continued Dollar strength against other major currencies.

Dot Plot Risks And Curve Implications

The main focus for the upcoming Federal Open Market Committee meeting will be the dot plot and inflation projections for 2026. After a year of anticipating cuts in 2025 that never came, we see a risk that the single projected rate cut for this year could be removed. This would be a hawkish signal for the market to digest. This risk is heightened by inflation that remains stubbornly above target, with the latest Core PCE reading for February coming in at a persistent 2.9%. At the same time, we’re watching the recent surge in WTI crude oil to over $95 a barrel, which complicates the inflation outlook. A potential upward revision of the Fed’s inflation forecast would be the justification for removing the planned cut. However, the Fed must also weigh its full employment mandate. The surprisingly weak February payrolls report, which added only 95,000 jobs and saw unemployment tick up to 4.2%, gives dovish members a strong argument to hold off on any hawkish moves. This tension between sticky inflation and a slowing labor market creates the central uncertainty. For derivative traders, this suggests buying US Dollar call options against the Euro or Yen is a sensible strategy. It provides a defined-risk way to profit from a hawkish surprise if the Fed removes the 2026 rate cut. This positioning allows for upside if the dollar strengthens while capping potential losses if the Fed maintains its current guidance. This potential policy shift would also reshape the Treasury curve, likely causing a bear flattening scenario where short-term yields rise faster than long-term ones. We are considering positions in interest rate futures that would benefit from a narrowing of the spread between the 2-year and 10-year Treasury yields. Create your live VT Markets account and start trading now.

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US index futures were firmer into New York on 18 March 2026, with attention on central pivots ahead of the Fed rate decision and FOMC projections. Dow and S&P 500 were further along in the rebound than Nasdaq, while VIX levels were watched as a risk check. Dow futures were at 47,279, above TPO POC 47,020, VPOC/CP 47,022, and VAH 47,240, with VAL 46,960. Key levels were CP 47,297, UG 47,481–47,595, UR 48,078, LG 47,133–47,031, and LR 46,600.

Key Index Levels

S&P 500 futures were at 6,753, near TPO POC 6,755, above VPOC/CP 6,742, with VAH 6,762 and VAL 6,730. Key levels were CP 6,764, UG 6,788–6,803, UR 6,866, LG 6,731–6,711, and LR 6,627, with price up about 0.45%. Nasdaq futures were at 24,939, near LG 24,939–24,870, with TPO POC 24,947, VPOC/CP 24,960, VAH 24,990, and VAL 24,860, up about 0.60%. Key levels were CP 25,051, UG 25,134–25,186, UR 25,405, and LR 24,579. VIX was in the 21.78–20.70 band, with reference levels at 24.80–23.54 and CP 26.38. A move towards or above 26.38 was flagged as a warning for the rebound. We are watching a market holding its breath ahead of this afternoon’s Fed decision. The recovery in futures brings the S&P 500 to a critical pivot around 6,764, a level that has repeatedly rejected previous advances. Given that February’s inflation report showed CPI sticking at a higher-than-expected 2.9%, any hawkish tone from the Fed could easily cap this rally. The VIX sitting near 21 is giving us some breathing room, but it feels fragile. We remember how volatility spiked above 30 after the September 2025 meeting when the Fed signaled more hikes than the market anticipated. A VIX holding below 22 is essential for any rally to have a chance following today’s announcement.

Post Fed Trading Plan

For the next few weeks, a neutral options strategy seems prudent until the Fed’s path is clearer. Buying straddles or strangles on major indices like the SPX allows us to profit from a large move in either direction, which is exactly what a major policy surprise could deliver. This approach lets us trade the expected post-announcement volatility without having to guess the market’s direction correctly. The Nasdaq’s lag is telling, as it remains the most sensitive to interest rate expectations. With the 10-year Treasury yield creeping back toward 4.3% this past month, high-growth sectors are feeling the pressure more than others. We need to see the Nasdaq reclaim its 25,051 pivot to confirm that this recovery has broad market support. After the dust settles today, our focus will shift from predicting the news to reacting to the price action. If the S&P 500 can build acceptance above 6,764, we can consider cautiously selling puts or adding to long positions. A firm rejection from that level, however, would signal that the market is not ready, making it a good spot to take profits or initiate short-term hedges. Create your live VT Markets account and start trading now.

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