The RBA meets tomorrow for its third policy meeting of the year, and most forecasts point to another rise. In a Bloomberg survey of 28 economists, 27 expect a 25 basis point increase, while 1 expects no change.

Futures markets imply about a 75% probability of a rate rise. Even so, a pause remains possible given earlier tightening, softer March data, and a split board.

Inflation Expectations And Policy Outlook

March inflation was 4.6%, above the RBA’s 2–3% target range, and it would still be above target even without energy. Melbourne Institute surveys show inflation expectations have risen to 5.9%, more than 1 percentage point higher than at the start of the year.

Second-round effects were not evident in the March inflation data. However, higher inflation expectations could increase the risk of such effects in coming months.

Recent speeches indicate RBA members have, on average, used more hawkish language in the weeks since the last rise than before it. The impact of prior rate rises may take time to flow through to the real economy.

We see a strong conviction in the market for a third consecutive rate hike from the Reserve Bank of Australia. Futures are pricing in about a 75% chance of another 25-basis-point increase. This consensus is built on inflation remaining stubbornly high and hawkish comments from the central bank.

We only need to look back to the Bank of Canada’s surprise pause in early 2025 to see how markets can react. The Canadian dollar fell over 1.5% in a single session when the market was similarly positioned for a hike. This historical precedent shows how quickly sentiment can shift when a central bank deviates from the expected path.

Trading Implications For Rates And Currency

Recent data supports this hawkish view, with the latest monthly CPI indicator for April 2026 ticking up to 4.7%, showing inflation is not yet tamed. Furthermore, the unemployment rate remains low at 3.9%, giving the RBA confidence that the economy can handle further tightening. This is a similar pattern to what we saw in other developed economies back in 2023 when they were fighting persistent inflation.

Despite the high probability of a hike, we must consider the potential for a surprise pause. The full impact of the RBA’s previous two hikes has yet to filter through to the real economy. A sudden dovish turn would catch many off guard, as the board could cite softening retail sales data as a reason to wait and see.

This setup suggests that volatility in the Australian dollar is underpriced heading into the announcement. Traders could consider buying short-dated AUD/USD options, such as a straddle, to profit from a larger-than-expected move in either direction. The risk is skewed, as a surprise pause would likely cause a much sharper drop in the Aussie dollar than the rally from an expected hike.

For those trading interest rate futures, the current pricing already reflects the expected hike. A position that benefits from a ‘no hike’ scenario, such as buying Australian 3-year government bond futures, offers an attractive risk-reward profile. If the RBA does pause, these futures would rally significantly as yields fall.

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A senior Iranian official told Reuters that Iran fired a warning shot at a US warship to stop it entering the Strait of Hormuz. The official said it was unclear whether any damage occurred.

Iran’s Tasnim News agency, citing an unnamed source, reported that Tehran is ready for any possible scenario. The report said Iran would not allow US forces to pass through the Strait of Hormuz.

Market Reaction And Dollar Strength

In markets, the US Dollar held firm against other major currencies in the second half of trading on Monday. The USD Index was up 0.2% at 98.40 at the time of reporting.

Given this direct threat to passage through the Strait of Hormuz, we should immediately consider long positions in crude oil derivatives. With nearly 20% of the world’s oil supply transiting this chokepoint, any disruption could send prices soaring. We are already seeing Brent crude futures for July delivery jump over 4% to $92.50 a barrel, so buying call options could prove profitable if the situation worsens.

This level of geopolitical tension will inject significant fear into the market, making long volatility a prudent strategy. The VIX has already surged past 22, a level we have not seen sustained since the banking sector concerns in late 2025. We should consider buying VIX futures or call options as a direct hedge against the broader equity market uncertainty that will follow.

The initial flight to safety is bolstering the US Dollar, which confirms its safe-haven status. As the Dollar Index pushes toward the 99.00 handle, we can use currency options to bet on its continued strength against the Euro and Japanese Yen, which belong to economies highly dependent on imported oil. This trade has performed consistently during past Middle East crises, including the flare-ups we observed in 2024.

Equity Risk And Defensive Positioning

We must also be prepared for a downturn in equity markets, as higher energy costs and war risk can quickly damage investor sentiment. Buying put options on major indices like the S&P 500 or on exchange-traded funds for the transport sector offers a way to profit from or hedge against a potential sell-off. Reports are already showing that maritime insurance premiums for the region have tripled overnight, indicating a real economic impact is already being priced in.

Finally, this is a classic catalyst for gold, and we should anticipate capital flows into precious metals. Gold is a traditional hedge against conflict and the potential inflationary effects of an oil shock. With gold futures already climbing 1.5% to over $2,450 an ounce, call options could provide leveraged upside if diplomatic solutions fail in the coming days.

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The Pound (GBP) gave up early gains against the US Dollar (USD) on Monday, extending a fall from Friday’s peak above 1.3650 to lows below 1.3550. Rising tensions in the Middle East increased demand for the safe-haven USD.

Iran’s Fars news agency reported that two missiles hit a US warship after it ignored an Iranian warning and aimed to pass through the Strait of Hormuz. The report pushed oil prices and the USD higher.

Strait Of Hormuz Tensions

The moves followed an announcement by US President Donald Trump of a plan to free vessels stranded in Hormuz, due to start on Monday. The plan was announced without detailed operational information.

Tehran warned that any US military incursion into Iranian waters would be treated as a ceasefire breach and would be met with “full strength.” The warning added to risk-averse trading.

In the UK, Monday’s economic calendar is light. In the US, March Factory Orders and a speech by New York Fed President John Williams are scheduled.

Later in the week, the US ADP Employment Change is due on Wednesday, with Nonfarm Payrolls (NFP) on Friday. More Federal Reserve speakers are also due across the week.

Key Market Drivers Ahead

We are reminded of how geopolitical shocks, like the US-Iran tensions in the Strait of Hormuz during 2025, can rapidly shift market sentiment. That incident sent investors fleeing to the safety of the US Dollar, causing GBP/USD to drop sharply. This fundamental pattern of risk-aversion boosting the dollar remains a key consideration for us today.

Currently, similar tensions are contributing to market volatility, with ongoing shipping disruptions in the Red Sea keeping oil prices elevated. Brent crude has been trading above $90 a barrel for the last month, a significant increase from the low $80s we saw at the start of the year. This persistent uncertainty provides a strong underlying bid for safe-haven assets like the dollar.

The US economy continues to show resilience, further supporting the dollar’s strength. Last week’s Nonfarm Payrolls report for April 2026 showed a robust addition of 240,000 jobs, while the latest CPI data revealed inflation remains sticky at 3.1%. This strong data makes it unlikely the Federal Reserve will consider cutting interest rates anytime soon.

In contrast, the UK’s economic picture is less clear, which weighs on the Pound. First-quarter GDP growth for 2026 was a sluggish 0.1%, and recent Bank of England commentary has hinted at a greater willingness to ease policy to support the economy. This growing divergence in central bank outlooks puts fundamental pressure on the GBP/USD pair.

Given this backdrop, we should anticipate heightened volatility in the coming weeks. Implied volatility on GBP/USD options has already ticked up to a three-month high, suggesting the market is pricing in larger price swings. Traders should consider strategies that benefit from this, such as buying puts to hedge against further downside or using option spreads to define risk on short positions.

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The European Central Bank (ECB) has indicated a leaning towards changing rates in June, contrasting with the Bank of England’s (BoE) preference to wait for more confirmation. This marks a shift away from earlier messaging that policy was “in a good place”.

ECB guidance is expected to shape rate pricing across Europe into year-end, alongside differing outlooks for Norges Bank and the Riksbank. These differences are expected to affect NOK–SEK and euro-area rate expectations.

Policy Divergence Between The ECB And BoE

President Christine Lagarde said the ECB did not see the economy facing second-round effects, but added she knew “where the ECB is headed on interest rates”. BoE Governor Andrew Bailey described holding rates as “a reasonable place”.

For the Riksbank, March inflation data showed sequential declines in both CPI and CPI-F. This led markets to remove almost 50bp of expected tightening through mid-April, before expectations rose again due to ceasefire uncertainty.

The article states it was produced with an artificial intelligence tool and reviewed by an editor. It is attributed to the FXStreet Insights Team.

The European Central Bank is clearly signaling a rate cut for its June meeting, a path President Lagarde has been guiding markets toward for weeks. This stands in contrast to the Bank of England, which is holding steady as UK inflation remains sticky, last reported at 3.1% in April. Traders should look at strategies that profit from this divergence, such as option structures that bet on the euro weakening against the pound (EUR/GBP).

Implications For Norway And Sweden

This forward guidance from the ECB marks a significant shift from their more cautious stance throughout 2025, when policy was described as being in a “good place.” Back then, we had to read between the lines, but now the direction is explicit. This clarity should give traders confidence in pricing short-term interest rate futures to reflect a faster pace of easing in the Eurozone compared to the UK.

We see an even starker policy split when looking at Norway and Sweden. Norges Bank is expected to keep its rates high for the remainder of the year, supported by a resilient domestic economy and strong energy prices. Historically, Norway has often prioritized its own economic conditions over following the path of its larger European neighbors.

The Riksbank in Sweden, however, is facing a different reality, with recent inflation data for March falling to 1.9% and growth expectations remaining weak. This is a dramatic change from the hawkish expectations we saw in mid-2025, but the soft data has forced a dovish turn. Therefore, we believe a key trade for the coming weeks is to be long the Norwegian krone against the Swedish krona (NOK/SEK) to capitalize on this growing policy gap.

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Gold fell further on Monday, trading just under $4,550 in the European session. Prices moved below $4,550 in risk-off markets, with support eyed near $4,500.

Rising tensions between the US and Iran, centred on the Strait of Hormuz, supported the US Dollar and weighed on gold. US President Donald Trump said a plan was in place to free vessels blocked in the strait, without giving details.

Technical Signals Remain Bearish

Iran said the waterway would remain closed and warned that any US military move into the area would be treated as a ceasefire violation. Iran said it would respond with “full strength”.

On the 4-hour chart, the Relative Strength Index was near 36 and the MACD was in negative territory. This kept the near-term bias bearish from mid-April highs.

The next support zone was between the April 29 low at $4,510 and late March lows just below $4,500. Below that, targets were the March 26 low near $4,350 and the March 23 low near $4,100.

On the upside, resistance was seen at Friday’s high of $4,660, with mid-April highs below $4,900. Central banks added 1,136 tonnes of gold worth around $70 billion in 2022, the highest yearly purchase on record.

The current downward trend in gold seems to be gaining strength, driven largely by a stronger US Dollar. Escalating tensions in the Strait of Hormuz are causing investors to flock to the dollar as a primary safe haven, putting pressure on gold prices. Recent data supports this, with the Dollar Index (DXY) hitting a three-month high of 106.50 last week following reports of a near-miss incident between US and Iranian naval vessels.

Derivative Strategies For A Lower Gold Price

For derivative traders, this situation suggests looking at bearish strategies in the coming weeks. Buying put options on gold futures or related ETFs could be a direct way to capitalize on the move towards the $4,500 target. We could also consider bear put spreads to limit the initial cost while targeting this specific downside level.

Adding to the bearish case, the most recent Consumer Price Index (CPI) report for April showed inflation cooling slightly to 2.9%, just below forecasts. This eases some of the pressure to hold gold as an inflation hedge, giving sellers more confidence. This is a noticeable shift from the inflation worries that dominated market sentiment throughout much of 2025.

Furthermore, reports from the World Gold Council indicate that central bank buying, while still positive, slowed in the first quarter of 2026 compared to the record pace we saw last year. This slight reduction in demand from the largest buyers removes a key pillar of support for the metal. The People’s Bank of China, for instance, reported its smallest monthly purchase in over 18 months.

The current market dynamic is a clear return to the classic inverse relationship between the dollar and gold. This contrasts with periods in the second half of 2025, when fears of a global recession caused both assets to rally together. With the US economy showing resilience, the dollar is now the preferred safe-haven asset.

Traders should watch the $4,510 level closely, which marks the low from late April. A firm break below this support would likely open the door for a quick test of the psychological $4,500 mark. Any upward bounces will likely meet resistance near last Friday’s high of $4,660, which could present an opportunity to initiate new short positions.

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The ECB is leaning towards a rate move in June, based on remarks after its April decision. This differs from the Bank of England, which is waiting for more confirmation while keeping rates unchanged.

The guidance marks a shift away from the earlier “policy in a good place” approach. The differing stances are expected to affect Euro-area rate pricing into year-end.

Policy Divergence Outlook

Attention is also on upcoming decisions from Norges Bank and the Riksbank. Markets are still pricing in multiple rate rises by year-end for both.

For the Riksbank, March inflation was weaker, with sequential declines in both CPI and CPI-F. This led to almost 50bp being removed from tightening expectations through mid-April.

Expectations have partly risen again, linked to uncertainty around a ceasefire. The article states the Riksbank is not expected to move this year, while NOK–SEK divergence may become clearer over coming cycles.

The piece was produced using an AI tool and checked by an editor. It was published by the FXStreet Insights Team.

Derivatives Strategy Implications

Looking back at the analysis from 2025, the predicted divergence between the European Central Bank and the Bank of England is still the dominant theme. The ECB did indeed begin its cutting cycle in June 2025, establishing a clear lead over its peers. Now, this ongoing policy gap presents clear opportunities in rate and currency derivatives.

We see the ECB continuing its path of easing, especially with recent data showing Eurozone inflation moderating to 2.3% and quarterly GDP growth at a sluggish 0.1%. Traders should consider positioning for this through options on EURIBOR futures, which could profit if the market prices in an even faster pace of cuts than currently expected. This reflects the ECB’s persistent focus on reviving economic activity.

In contrast, the Bank of England remains more cautious due to stickier domestic inflation, which recently printed at 2.8%. This sustained policy gap suggests that trades on the spread between UK and Eurozone short-term interest rates will remain profitable. Derivative strategies that bet on the spread between SONIA and EURIBOR futures widening further should be considered.

The divergence in the Nordic region that we highlighted in 2025 has also materialized, with the Norwegian Krone significantly outperforming the Swedish Krona. Norway’s stronger economic footing has kept its central bank on hold, while Sweden has been forced to ease more aggressively. The trade now is less about direction and more about volatility, as further policy surprises could lead to sharp moves in the NOK/SEK exchange rate.

Given these diverging central bank paths, implied volatility in currency markets, particularly for EUR/GBP, is likely to increase around policy meetings. We believe buying options to position for larger-than-expected price swings is a prudent strategy. This allows traders to benefit from the uncertainty without committing to a specific directional view.

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Gold (XAU/USD) fell below $4,550 in Monday’s European session, extending losses and moving towards last Thursday’s lows just above $4,500. Risk-off trading and rising tensions between the US and Iran supported the US Dollar and weighed on gold.

US President Donald Trump said the US plans to free vessels blocked in the Strait of Hormuz, without giving operational details. Iranian authorities said the waterway will remain closed and warned that any US military incursion would breach the ceasefire, with a response in “full strength”.

Technical Picture And Key Levels

On the 4-hour chart, the trend stays bearish from the mid-April highs, with RSI near 36 and MACD moving into negative territory. Support is seen between the April 29 low at $4,510 and late March lows just below $4,500, then at the March 26 low near $4,350 and the March 23 low near $4,100.

Resistance stands at Friday’s high of $4,660, with mid-April highs below $4,900 above that. Central banks added 1,136 tonnes of gold worth around $70 billion in 2022, the highest yearly purchase since records began.

Looking back to this time in 2025, the market was bracing for a significant drop in gold, with many bears targeting the $4,500 support level. This bearishness was fueled by a strong US Dollar and specific geopolitical tensions in the Strait of Hormuz. The technical setup at the time strongly suggested more downside was imminent.

However, that deep slide below $4,500 never fully materialized, and we’ve spent much of early 2026 consolidating above that key level. The current environment is now shaped by a Federal Reserve that has begun a cautious easing cycle, a stark contrast to the monetary policy of a year ago. The CME FedWatch Tool now indicates a greater than 70% probability of another rate cut by the fourth quarter, which is fundamentally changing the landscape for non-yielding assets.

Central banks remain a major force, continuing the aggressive buying spree we saw throughout 2025. The World Gold Council reported that global central banks added a robust 290 tonnes in the first quarter of 2026, signaling strong institutional demand below the $4,800 mark. Consequently, the US Dollar Index (DXY) has softened from its 2025 highs, now hovering around 102, which removes a key headwind for gold.

Positioning And Hedging Considerations

For derivative traders, this suggests a shift away from outright bearish bets like buying puts. Instead, strategies that benefit from range-bound price action or a slow grind higher seem more appropriate now. We’re seeing increased interest in selling out-of-the-money puts to collect premium around the established $4,500 support level.

It is important to remember that underlying geopolitical risks, now more focused on Eastern Europe and East Asia, could still trigger sharp moves. This makes buying long-dated call options an attractive hedge for those anticipating a sudden flight to safety. Volatility is relatively subdued compared to last year, making option premiums more affordable for positioning for a potential breakout.

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Crude oil prices rose in European trading on Monday amid reports of rising tension in the Middle East. West Texas Intermediate (WTI) traded near $103.50, up about 4% on the day, while Brent was at $112, up 4.1%.

Iran’s Fars News Agency reported that a US warship trying to pass through the Strait of Hormuz was targeted and hit by two missiles after ignoring warnings from Iran. Iran’s state TV reported the warship then turned back and did not enter the strait.

The first priority is confirming these reports, as initial headlines often cause overreactions. Implied volatility in oil options has likely exploded, making strategies like buying calls very expensive but potentially very profitable. We saw this back in early 2022 after the Ukraine invasion when the CBOE Crude Oil Volatility Index (OVX) more than doubled in a matter of weeks.

The key risk here is the Strait of Hormuz, a critical chokepoint for global energy. Around 21 million barrels of oil, or about 20% of daily global consumption, passed through it last year according to the latest EIA data. A full or partial closure would remove a massive amount of supply from the market almost overnight.

We should be watching the Brent and WTI forward curves, which will likely blow out into a steep backwardation, signaling extreme near-term supply fears. This is especially concerning given that global inventories were already showing modest draws through the first quarter of 2026. The spread between the front-month and six-month contract is a key indicator to monitor for signs of panic.

However, we remember the attacks on Saudi facilities back in 2019, which caused a huge initial price spike that faded within two weeks as production was restored. If this turns out to be a limited engagement without a sustained blockade, this rally could be short-lived. Therefore, using call spreads to define risk might be more prudent than holding outright long futures positions until there is more clarity.

This isn’t just a crude oil story; we are watching for a surge in refining margins. The crack spread, which measures the profitability of turning crude into gasoline and diesel, should widen significantly on fears of feedstock disruption. Trading product futures or options could be another way to express a bullish view on this event.

Iran’s Fars News Agency said on Monday that a US warship was hit by two missiles near Jask island after it ignored an Iranian warning and intended to pass through the Strait of Hormuz, according to Reuters.

Iran’s state TV, citing the Iranian navy, said Iran prevented the entry of US warships into the strait.

Markets Shift To Risk Off

After the report, markets moved towards lower risk. At the time of press, US stock index futures were down 0.3% to 0.6% on the day.

The US Dollar Index was up 0.25% at 98.45.

We are seeing markets react to news of a US warship being struck by missiles near the Strait of Hormuz. This immediate risk-off sentiment is a clear signal for traders to anticipate heightened volatility in the coming weeks. The CBOE Volatility Index (VIX) has already jumped over 40% to 25.5, a level we have not seen since the banking sector concerns of early 2025.

The most direct impact is on oil prices, given that roughly 20% of the world’s total oil consumption passes through this chokepoint. We have seen Brent crude futures surge over 9% to $112 a barrel, as supply disruption fears take hold. Traders should consider long positions on crude oil options, as any further escalation could push prices to highs not seen since 2022.

Sector Winners And Losers

This event creates clear winners and losers across equity sectors. We anticipate defense contractors like RTX and Lockheed Martin will see significant upward momentum, making call options on these names attractive. Conversely, industries heavily reliant on fuel costs and global stability, such as airlines and cruise lines, will face immense pressure, presenting opportunities for put options.

As a flight to safety continues, the US Dollar will likely extend its gains. We are also seeing gold prices climb, with futures for the precious metal up 2.2% to $2,385 per ounce. Trading derivatives on safe-haven assets like gold ETFs or currency futures that favor the dollar could provide a hedge against falling equity markets.

This situation is reminiscent of the 2019 drone attacks on Saudi Aramco facilities, which caused a temporary but sharp spike in oil and global market jitters. However, a direct military confrontation between state actors carries significantly more weight. We must therefore prepare for a period of sustained uncertainty, rather than a brief shock.

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The US Dollar rose against major currencies on Monday. The USD Index (DXY) moved back above 98.00 after rebounding from 97.70 on Friday, but stayed in the lower part of its recent trading range.

US–Iran verbal tensions increased after President Donald Trump said a plan to free vessels stranded in Iran would start on Monday. Trump gave no further details, while Tehran said any US military entry into Iran’s waters would breach the ceasefire and would be met with “full strength”.

Dollar Strength Amid Rising Tensions

Oil prices rose after Trump’s announcement. US benchmark West Texas Intermediate (WTI) traded a few cents below $100, which reduced demand for riskier assets and put pressure on the Euro and the Japanese Yen.

In the US data calendar, attention was on March Factory Orders. Later in the week, markets were set to follow April job reports, including Friday’s Nonfarm Payrolls.

These labour figures were in focus after last week’s Federal Reserve meeting. The meeting showed a more hawkish stance, with three dissenters opposing the inclusion of an “easing bias” in the statement.

We remember how the US Dollar Index bounced from the 97.70s to above 98.00 around this time in 2025, driven by escalating verbal tensions with Iran. That risk-off sentiment was a key factor in the market, pushing capital into the perceived safety of the dollar. The situation today, however, presents a different landscape for traders.

Shifting Market Drivers

Last year’s conflict fears sent West Texas Intermediate crude oil soaring towards the $100 mark, acting as a major headwind for energy-importing economies. Today, WTI is trading at a much calmer $81 a barrel as those specific geopolitical risks have faded and global production has stabilized. This shift means currency derivative pricing should be less sensitive to Middle East headlines and more tuned to economic supply and demand fundamentals.

The Federal Reserve’s hawkish tone in 2025, which saw three members dissent against an easing bias, was a primary driver that eventually propelled the DXY to its current level of 105.50. Now, after a long period of restrictive policy, recent data like the April jobs report, which came in at a softer-than-expected 175,000, suggests the economy is finally cooling. We should now be positioning for a potential dovish pivot from the Fed, a stark contrast to the hawkishness of a year ago.

Given this, strategies that were effective in 2025 may now be outdated. With lower energy costs helping Europe and the Fed signaling a potential peak in rates, derivative plays like buying EUR/USD call options to bet on a rising Euro could offer value. We should also be wary of the high volatility that could hit the Japanese Yen, as any confirmed Fed easing might quickly unwind profitable carry trades.

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