Commerzbank’s Michael Pfister reviews EUR/USD options and says the link between implied volatility and risk reversals has moved back towards the pattern seen before “Liberation Day”. He adds that the shift seen in April affected more than EUR/USD, although it did not last as long in other currency pairs. He notes that, in the earlier regime, rising implied volatility often came with higher demand for protection against US dollar strength. This showed up as more negative EUR-USD risk reversals.

Implied Volatility And Risk Reversals

Since the start of the Iran conflict, he says this EUR/USD relationship has weakened. He attributes this to factors that support a weaker euro against the US dollar, which can increase demand for hedges against dollar strength. He also says markets can return to a long-running balance in which the US dollar keeps safe-haven features. He argues that repeated shocks are usually needed before that behaviour changes for the long term. It appears the market is reverting to a familiar pattern where the US dollar strengthens during periods of uncertainty. Since the Iran conflict last year, we have seen higher implied volatility in EUR/USD once again align with greater demand for hedges against a falling Euro. This is a return to the long-standing dynamic that was briefly disrupted in 2025. There are good fundamental reasons supporting this shift toward a weaker Euro. Recent data from this month shows the German IFO Business Climate index unexpectedly fell to 89.5, and broader Eurozone Q1 2026 growth forecasts have been revised down to just 0.1%. This economic softness in Europe makes holding the Euro less attractive.

Options Market Implications

Conversely, the US economy continues to show resilience, which bolsters the dollar’s appeal. The latest US inflation report for February 2026 came in at a stubborn 3.3%, diminishing expectations for near-term Federal Reserve rate cuts and supporting higher US yields. This divergence in economic outlook between the US and the Eurozone is a powerful driver for the currency pair. In the options market, this sentiment is clear. The one-month risk reversal for EUR/USD has moved deeper into negative territory, recently hitting -0.60, indicating that puts which protect against a fall in the Euro are significantly more expensive than calls. We saw this same relationship solidify after the initial shift began back in April of 2025. For the coming weeks, this means positioning for continued or renewed US dollar strength is logical. Traders should consider that hedging against a stronger dollar is no longer a contrarian view but aligns with the market’s rediscovered equilibrium. Strategies that benefit from a declining EUR/USD, such as buying puts or establishing put spreads, are therefore more in line with the current options pricing and macroeconomic environment. Create your live VT Markets account and start trading now.

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EUR/USD met mild selling near 1.1550 in European trading on Wednesday, after rising for two sessions. The pair stalled as the US Dollar tried to steady ahead of the Federal Reserve decision due at 18:00 GMT. The US Dollar Index (DXY), which measures the Dollar against six major currencies, attempted to find support near 99.50. This followed declines over the previous two trading days.

Fed Decision In Focus

Markets expect the Fed to keep interest rates unchanged at 3.50%–3.75%, based on the CME FedWatch tool. Global inflation expectations have risen alongside higher oil prices linked to conflict involving Iran. With rates expected to stay on hold, attention is on the Fed’s dot plot and Chair Jerome Powell’s press conference. The dot plot summarises where policymakers see the federal funds rate over coming periods. The euro traded broadly lower ahead of the European Central Bank decision on Thursday. The ECB is also expected to leave rates unchanged, with Eurozone inflation remaining near the 2% target for an extended period. Looking back to this time in 2025, we recall the market’s focus on both the Fed and ECB holding rates steady, with EUR/USD hovering around 1.1550. The main concern then was the inflationary pressure from rising oil prices due to geopolitical tensions. That period of waiting set the stage for the policy divergence that followed.

Positioning For Rate Divergence

A year later, we see the results of that tension, as inflation proved more persistent than anticipated. The U.S. Consumer Price Index is currently running at 3.1% annually, prompting the Fed to hold rates in the much higher 5.25%-5.50% range. The Eurozone’s inflation is slightly lower at 2.8%, but it has also kept the ECB’s policy restrictive. This environment of high but differing inflation and interest rates creates opportunities in volatility markets. With the Cboe Volatility Index (VIX) currently trading at a relatively low 13.8, complacency may be setting in ahead of future central bank announcements. Derivative traders should consider that any surprise data point could cause a sharp spike in implied volatility, making long vega strategies like straddles on EUR/USD potentially profitable. The key question now is not if central banks will hold, but who will cut rates first and how quickly. We should be using derivatives to position for this divergence over the next few quarters. For example, if we believe persistent U.S. economic strength will delay Fed cuts relative to the ECB, purchasing longer-dated put options on EUR/USD allows us to position for potential downside in the pair. Create your live VT Markets account and start trading now.

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Brent crude stayed above $100 per barrel, ending at $103.42 after rising 3.20% and closing above $100 for a fourth straight session. Daily price swings narrowed, with the first session since 5 March trading in a range of less than 5%. Prices were supported by conflict-linked supply risks and Iranian strikes. Oil later fell by a couple of percent after reports of an Iraq–Turkey agreement to resume exports through Turkey, reducing reliance on the Strait of Hormuz.

Futures Markets Signal Higher Prices Longer

Markets also priced in higher oil for longer through futures. Six-month Brent futures rose 3.26% to $86.12 per barrel. Moves in wider markets included more positive risk sentiment and lower yields even as Brent remained above $100. A relief rally was linked to more moderate oil price moves than in recent sessions. Looking back at this time in 2025, we saw a market trying to find its footing as Brent crude stayed above $100 a barrel. While prices were high due to supply risks, an Iraq-Turkey export deal provided some relief and helped narrow the daily trading ranges. This signaled that extreme volatility was starting to ease, even as the market prepared for a longer period of elevated prices. Today, with Brent trading around $94 per barrel, the situation feels less frantic but uncertainty remains. The Cboe Crude Oil Volatility Index (OVX) is currently near 42, which is well below the peaks seen during major supply shocks but still higher than the historical average in the low 30s. This suggests that selling options to collect premium, such as covered calls against long positions or slightly bearish call spreads, could be a viable strategy to capitalize on remaining volatility expectations.

Curve Structure And Relative Value Trades

Last year, the futures market showed significant backwardation, with six-month futures trading at a steep discount to the spot price, indicating an expectation that prices would fall. In contrast, the current futures curve is much flatter, with the six-month contract only a few dollars below the front-month price, suggesting the market sees prices as more stable. This environment could favor calendar spread trades, where one might sell a near-term contract and buy a longer-dated one to profit if the curve steepens. The geopolitical focus from 2025 on bypassing the Strait of Hormuz remains highly relevant. Given that roughly 20% of global oil consumption still passes through that chokepoint, any new tensions in the region could cause the price spread between Brent and Dubai-Oman crude to widen again. We should consider trades that go long Brent futures while shorting crude grades more dependent on Hormuz, as this spread offers a hedge against specific regional flare-ups. Create your live VT Markets account and start trading now.

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Austria’s Harmonised Index of Consumer Prices (HICP) rose by 2.3% year on year in February. This was up from 2.0% in the previous reading. This uptick in Austrian inflation is not an isolated event; it mirrors the broader trend we are seeing across the currency bloc. The latest flash estimate for the entire Eurozone in February also showed inflation rising to 2.5%, moving away from the European Central Bank’s 2% target. This data challenges the prevailing view that price pressures were on a consistent downward path.

Implications For Ecb Rate Cuts

We believe this inflation surprise pushes back the timeline for any potential ECB interest rate cuts, likely removing a second-quarter cut from consideration. Traders should anticipate a more hawkish tone from the central bank and consider paying fixed on euro interest rate swaps to position for rates staying higher for longer. The futures market is already repricing, with the implied yield on contracts for the second half of the year having risen by 15 basis points in the last week. This shift in rate expectations is likely to provide support for the euro, especially as other central banks may still be considering easing. We are exploring options strategies that would benefit from EUR/USD strength, such as buying near-term call options. Implied volatility in the pair has picked up slightly to 8.2%, suggesting the market is beginning to price in a wider range of outcomes. For equity markets, this is a clear headwind, disrupting the disinflationary trend that supported the rally we saw through much of 2025. Higher for longer interest rates can pressure corporate earnings and valuations, increasing the risk of a market pullback. We would suggest using put options on indices like the EURO STOXX 50 as a hedge against portfolios. It is critical to note that core inflation, which strips out volatile food and energy costs, has proven particularly stubborn, holding firm at 2.7% across the Eurozone. This suggests underlying inflation is still embedded in the services sector. All eyes will now be on the next set of inflation prints to determine if February was a temporary blip or the start of a more worrying trend.

Key Risk Core Inflation

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South Africa’s Consumer Price Index (CPI) inflation eased to 3% year on year in February. This was down from 3.5% in the previous reading. With South Africa’s annual inflation dropping to 3% in February, it is now sitting at the very bottom of the South African Reserve Bank’s target range. This significant cooling of price pressures reduces the likelihood of any further interest rate hikes. For us, this signals a major shift in monetary policy expectations for the coming year.

Inflation And Growth Signals

This lower inflation figure is consistent with other signs of a slowing economy. The most recent Absa Manufacturing PMI for February 2026 dipped into contraction territory at 48.8, while January’s retail sales growth was extremely weak. This combination of disinflation and sluggish activity makes a future interest rate cut a real possibility. Given this outlook, we believe positioning for lower interest rates is the primary trade. Traders should consider receiving fixed on interest rate swaps, betting that floating rates will fall over the life of the contract. Forward Rate Agreements (FRAs) that lock in a lower JIBAR for future periods also look attractive now. This potential for monetary easing is likely to put pressure on the Rand. We recall how the SARB’s aggressive hiking cycle during 2025 provided crucial support for the ZAR, so a reversal in policy could weaken the currency. Buying call options on USD/ZAR is a defined-risk way to position for a depreciation in the Rand. The clearest opportunity may be in the government bond market, which reacts directly to interest rate expectations. Yields on the 10-year government bond have already fallen by 15 basis points to 9.25% on the back of this inflation news. We think going long on bond futures is a straightforward strategy to profit from rising bond prices as yields continue to fall.

Equity Market Volatility Outlook

For the equity market, the picture is less clear, creating opportunities for options traders. While lower rates could boost company valuations, the underlying economic weakness could hurt corporate profits. This uncertainty suggests that strategies betting on increased volatility, such as straddles on the FTSE/JSE Top 40 index, could be effective. Create your live VT Markets account and start trading now.

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The US Federal Reserve is expected to leave policy unchanged, with attention centred on Fed Chair Jerome Powell’s press conference. Markets are focused on how Powell addresses oil prices, the war, and the effect on US retail petrol. One focus is whether Powell may remain as Fed Chair beyond May, which could affect how his comments are interpreted. Market participants are also watching for the Fed’s approach to potential second-round inflation effects.

Key Inflation Signals From Fuel Prices

US retail petrol prices are almost exactly $1 higher, or 35.5% above 2026 lows, and have risen every day for four weeks. Markets are looking for the Fed’s reaction to these price moves and related risks for inflation expectations. Another focus is the Fed’s view of underlying economic conditions, alongside expectations that the US may exit the war and that energy prices may normalise. Powell’s remarks may emphasise economic resilience to reassure US households. US February producer price data is also due and has been volatile. The data is not expected to reflect war-related damage yet, though areas such as trucking prices may reflect immigration policies. With the Federal Reserve expected to hold rates steady, we are focused entirely on Chair Powell’s press conference for clues on future policy. The national average for gasoline just topped $4.15 per gallon this week, so any comments on the Fed’s tolerance for these second-round inflationary effects will be critical. This suggests that implied volatility on short-term interest rate futures will likely rise heading into the event.

Volatility Trading Focus

The uncertainty around Powell’s message makes volatility itself a tradable asset in the coming days. The VIX index is holding above 25, reflecting market anxiety and making options strategies like straddles on equity indices a potential way to play a significant post-announcement move. We are pricing in a much wider range of outcomes for the second half of 2026 based on how hawkish or dovish his tone is regarding energy prices. We remember how the Fed was slow to react to the initial inflation surge back in 2025, a mistake they will be keen to avoid now. Therefore, even though Powell may want to sound reassuring to households, he cannot ignore that West Texas Intermediate crude has held above $90 a barrel for three straight weeks. A hawkish surprise, signaling a focus on taming inflation despite the conflict, could strengthen the dollar and weigh on bond prices. The war and energy prices are supply-side issues that the Fed’s tools cannot directly fix. This creates a potential divergence we must watch, where the Fed tightens policy but energy costs remain high, squeezing corporate margins. For this reason, options on energy sector ETFs remain attractive as a hedge against the Fed being unable to control this component of inflation. This week’s producer price data for February will give us a final piece of the puzzle before Powell speaks. While it is too early for the data to reflect war damage, we are watching the transportation and warehousing component, which jumped over 1.2% last month alone. A similarly hot number would put more pressure on Powell to address inflation aggressively, regardless of his desire to project economic resilience. Create your live VT Markets account and start trading now.

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The Dollar index (DXY) fell for a second day, closing about 0.1% lower at 99.57 on Tuesday. The move came as markets positioned ahead of the Federal Reserve decision and reacted to geopolitical tensions linked to Iran. The Fed is widely expected to keep interest rates unchanged on Thursday at 2AM SGT. Attention is on how policymakers may respond if the war creates pressure on inflation while also weighing on jobs.

Fed Statement Watch

The Fed statement may refer to risks from the Iran war and add more balanced wording on the future rate path. It may point to upside risks to inflation and downside risks to employment. In the Summary of Economic Projections, markets expect a sharp rise in this year’s PCE inflation forecast and a slight downgrade to activity. The median projection is still expected to show one 25 bps rate cut this year. Looking back at the analysis from early 2025, we saw the dollar index showing broad weakness ahead of the Fed’s decision. The DXY fell for a second day to 99.57 as we all positioned for the central bank and reacted to geopolitical risk. This setup suggested that short-term dollar downside was the path of least resistance. At that time, we widely anticipated the Fed would hold rates steady, which the CME FedWatch tool showed with over a 90% probability for the March 2025 meeting. The market was correctly pricing in just one 25 basis point cut for later in that year. This created a tense environment where the Fed’s updated economic projections were more important than the rate decision itself.

Volatility Hedging Strategies

The uncertainty from the conflict in Iran caused a noticeable spike in implied volatility, which we saw reflected in the VIX index jumping above 20. This environment makes buying protection through options, such as puts on broad equity indices like the SPX, a prudent strategy. Hedging against sudden downside risk linked to geopolitical headlines should be a priority. That conflict also presented clear opportunities in energy derivatives, as WTI crude futures surged from the mid-$80s toward $95 per barrel in that period. We saw a significant increase in trading volume for call options on crude oil and energy ETFs. This remains a key strategy to position for further supply-side shocks that could drive inflation higher. Given the Fed’s conflicting goals of fighting inflation while minding downside employment risks, we should anticipate a choppy, range-bound dollar. This suggests strategies like selling strangles on major currency pairs such as EUR/USD could be effective. The goal is to collect premium from elevated volatility while the market waits for a clearer policy direction from the Fed. Create your live VT Markets account and start trading now.

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China’s foreign ministry said on Wednesday, during the European trading session, that it will provide updates on the delay to a meeting between US President Donald Trump and Chinese leader Xi Jinping. Trump said on Tuesday that the meeting would be postponed while the war with Iran continues. Trump told reporters at the White House, “We are resetting the meeting,” and said China agreed to the change, according to Al Jazeera. China’s foreign ministry said heads-of-state diplomacy has an irreplaceable role in US–China relations and that it will continue communication on Trump’s visit.

Market Reaction In Australia

Markets showed little immediate response in Australia. At the time of reporting, AUD/USD was 0.13% higher at about 0.7115. A trade war is an economic conflict driven by protectionist measures such as tariffs, which trigger retaliation and raise import costs and living costs. The US–China trade dispute began in early 2018, with US barriers followed by Chinese tariffs on goods including automobiles and soybeans. The US–China Phase One deal was signed in January 2020, but the Coronavirus pandemic shifted attention. Joe Biden kept tariffs and added some levies. Trump’s return as the 47th US President renewed tensions, after pledging 60% tariffs during the 2024 campaign and applying them on 20 January 2025.

Implications For Volatility

The delay in the presidential meeting introduces a new level of uncertainty, which is a key driver for market volatility. We expect implied volatility to rise, and traders might look at VIX call options as a way to hedge portfolios against a sudden market downturn. Looking back at the initial tariff announcements in 2025, we saw the VIX jump over 30% in a matter of weeks. The Australian dollar’s muted reaction is unlikely to hold, as it is a key liquid proxy for the Chinese economy. We have already seen China’s official manufacturing PMI dip to 49.5 in February, signaling contraction due to the new tariffs. Therefore, derivative traders may consider buying put options on the AUD/USD pair to position for a potential decline below the 0.7000 level. This prolonged uncertainty will likely weigh heavily on equity index futures, especially for the Nasdaq 100, given the tech sector’s exposure to Chinese supply chains and markets. We remember how chipmaker stocks were hit particularly hard during the trade escalations of 2018 and 2019. Selling index futures or buying puts on specific tech ETFs could become more common strategies. Commodity markets, particularly agriculture, are on high alert for retaliatory measures from China. US soybean futures are already reflecting this risk, having fallen nearly 15% since the 60% tariffs were confirmed early last year. Traders are likely using short positions in the futures market to hedge against a repeat of 2018, when China shifted its purchases to South America. The inflationary impact of these tariffs is becoming more apparent, with the latest US Consumer Price Index for February showing an increase to 3.9% year-over-year. This complicates the Federal Reserve’s policy path and creates opportunity in interest rate derivatives. Traders are increasingly using options on Treasury futures to bet on whether the Fed will have to delay planned rate cuts. Create your live VT Markets account and start trading now.

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EUR/USD moved back above 1.15 as US Treasury yields fell and risk sentiment improved. The move came ahead of the Federal Open Market Committee (FOMC) meeting. The FOMC meeting is expected to bring no change to US monetary policy. Markets are pricing in one US rate cut later this year, while Danske expects two.

Fed Wait And See Stance

The Federal Reserve is expected to remain in a wait-and-see stance linked to the war in Iran. The meeting is not expected to shift the EUR/USD outlook. US February producer price index (PPI) data is due ahead of the rate decision. Final February eurozone inflation data is also due before the European Central Bank’s policy rate decision, and is expected to confirm the flash estimates. We recall the situation back in early 2025 when the Federal Reserve adopted a wait-and-see approach due to geopolitical conflict, holding EUR/USD above 1.15. This period of central bank patience amid external shocks created a distinct trading environment. That backdrop serves as a useful lesson for navigating the market in the coming weeks. Today, the landscape is markedly different, with EUR/USD trading much lower around 1.08. This reflects the interest rate divergence that has favored the dollar over the past year. While the Fed is now holding rates steady, the market anticipates a pivot, currently pricing in approximately 75 basis points of cuts by year-end, according to CME FedWatch Tool data.

Options Market Volatility Setup

This expectation of future cuts, contrasted with the Fed’s current cautious stance, creates opportunities in the options market. Implied volatility for EUR/USD has been trending lower, recently hovering near 6.5%, suggesting complacency. Traders should consider buying volatility through structures like straddles, positioning for a sharp move when the Fed finally signals a definitive shift. Similar to the geopolitical tensions in 2025, we now see persistent supply chain concerns and conflicts impacting commodity prices. This keeps the Fed from acting rashly, as recent US CPI data shows inflation remains stubborn at 2.9%. This is higher than in the Eurozone, where HICP inflation has fallen to 2.4%, giving the European Central Bank more room to consider easing first. This inflationary divergence suggests the dollar’s strength may persist in the short term. Traders could use forward contracts to bet on a wider rate differential between the US and Europe over the next quarter. The market’s focus on every piece of incoming data, especially US Producer Price Index figures, will be intense. Given the Fed’s data-dependent position, any deviation from expectations in inflation or employment data will cause significant repricing. Looking at historical patterns from 2025, such periods of central bank inaction often end abruptly. Derivative traders should therefore remain hedged against a sudden break from the current trading range. Create your live VT Markets account and start trading now.

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Standard Chartered expects the Bank of England to keep rates unchanged at its 19 March meeting. It forecasts a 7–2 vote split, with two members likely supporting a 25 bps cut. The bank anticipates the BoE will treat any near-term rise in energy prices as temporary. The meeting minutes are expected to set out how each Monetary Policy Committee member is weighing risks linked to the Middle East conflict.

Outlook For Policy Rates

The note points to a weaker case for further rate rises. It also refers to some members viewing current rates as restrictive. UK labour market conditions are described as softer, with unemployment rising steadily since mid-2022. Wage growth has slowed since mid-2023, and the next data release is due on 19 March, before the BoE decision. Standard Chartered still forecasts more easing, with a terminal rate of 3.00%. Its base case is one cut per quarter from Q2, but it says the timetable is uncertain. It adds that easing could proceed if hostilities ease and energy prices fall. It also warns that a prolonged energy price spike could delay the next cut into H2 or 2027.

Implications For Traders

Looking back at this time last year, in March 2025, we recall the Bank of England holding rates with that 7-2 vote split. The anticipated easing cycle did begin later that year, but now in March 2026, the path forward is once again uncertain. This indecision creates opportunities for traders in interest rate markets. The core conflict for the Bank remains unchanged, balancing sticky inflation against a slowing economy. With the latest Consumer Price Index data from February 2026 showing inflation at a persistent 2.8%, hawks on the committee will be reluctant to cut further. Doves, however, will stress the downside risks to growth, creating a clear tension that will influence derivative pricing. The softening UK labour market we observed throughout 2025 has continued its trajectory. The unemployment rate has now ticked up to 4.9%, and wage growth has cooled to 3.5%, offering little real-terms increase for households. This backdrop strengthens the argument for further rate cuts, a view that can be expressed through options on SONIA futures. Geopolitical risks and energy prices remain a significant wild card, just as they were a year ago. We remember the lessons from the 2022 energy shock, and with Brent crude prices hovering near $90 a barrel, the Bank will be cautious about any move that could reignite inflation. This elevated uncertainty suggests options strategies that profit from volatility, like straddles, could prove useful. Given these cross-currents, we believe the Bank of England will likely hold rates steady again at its meeting tomorrow, but the probability of a cut in the second quarter is being underestimated. The conflicting data supports positioning for a steeper yield curve, as short-term rate expectations could fall sharply if growth data weakens further. Current market pricing of only 40 basis points in cuts by year-end seems too conservative and vulnerable to a dovish shift. Create your live VT Markets account and start trading now.

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