UK political risks are weighing on sterling sentiment, including Labour’s defeat in the Gorton by-election and the chance of a leadership challenge after the May local elections. GBP volatility may remain elevated in the near term. Analysts say it is unclear if ongoing political uncertainty justifies a higher fiscal risk premium, which has been linked to earlier bouts of pound weakness. They also point to data suggesting UK growth is firmer than the rise in the unemployment rate might imply.

BoE Policy And Rates Outlook

They cite ongoing disinflation and a loosening labour market as factors that support further Bank of England rate cuts. They add that rate cuts can provide fiscal relief. They note that this week’s gilt remit may support the fiscal outlook, following January’s large budget surplus. They expect EUR/GBP could drift lower over time if political risks ease. The current political friction within the Labour government continues to be a drag on the Pound’s sentiment. However, we believe the underlying economic strength is being overlooked by the market. This creates a disconnect between short-term political noise and the longer-term macroeconomic reality. Looking at the data from early this year, UK inflation has successfully cooled to 2.5%, and the economy posted modest 0.2% growth in the final quarter of 2025. With the unemployment rate holding steady at 4.5%, the Bank of England has room to provide support if needed. These fundamentals do not justify the current level of weakness we are seeing in Sterling.

Trading Approach For Elevated Volatility

In the immediate coming weeks, this political uncertainty suggests implied volatility in GBP options will remain elevated. Traders should consider buying straddles or strangles on EUR/GBP, which would profit from a significant price move in either direction once the situation finds clarity. This approach hedges against the political outcome while betting on the market’s eventual reaction. Once this political risk subsides, we see a clear path for the Pound to strengthen based on the improving economic backdrop. Positioning for a lower EUR/GBP seems prudent over the medium term. Selling out-of-the-money call options on EUR/GBP could be an effective way to express this view, capitalizing on both the expected move and elevated volatility premium. We saw a similar dynamic after the market turmoil of 2022, where political instability caused a sharp sell-off before a recovery driven by a return to fiscal orthodoxy. The historical precedent suggests that once the political picture stabilizes, the supportive macro data will likely push the Pound higher. This time, the fundamentals are even stronger than they were during that period. Create your live VT Markets account and start trading now.

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GBP/USD fell 0.49% on Monday and traded near 1.3400 as risk aversion rose during the US–Israel conflict with Iran. Demand for safe-haven currencies supported the US Dollar and weighed on Sterling. Reports said the US and Israel killed Iran’s supreme leader, Ayatollah Ali Khamenei, and Iran later attacked a British air base in Cyprus, causing limited damage. The US Dollar Index rose 0.76% to 98.39, adding pressure on GBP/USD.

Us Data And Market Focus

In US data, S&P Global said the February Manufacturing PMI rose to 51.6 from 51.2 and beat estimates. Markets are watching the ISM Manufacturing PMI, seen easing to 51.8 from 52.6. In UK politics, local elections in northern England weakened Prime Minister Keir Starmer’s position within the Labour Party. Bank of England rate-cut odds for the 19 March meeting fell to 48% from 84%, according to Prime Market Terminal. Technically, GBP/USD was at 1.3409, with resistance near 1.3500 and support at 1.3350. Further supports are 1.3250 and 1.3150, while upside levels include 1.3680 and 1.3835. Reflecting on the events of early 2025, we saw how the conflict in the Middle East immediately triggered a flight to safety, strengthening the US Dollar and pushing GBP/USD down towards 1.3400. That period demonstrated how geopolitical shocks can override domestic monetary policy expectations, as odds for a Bank of England rate cut were dramatically repriced. This established a clear playbook where heightened global risk translates directly into pressure on Sterling against the Greenback. As of early March 2026, the aftershocks of that conflict continue to influence the market, with Brent crude oil prices remaining stubbornly above $95 per barrel, weighing on the UK’s economic outlook. While UK inflation has cooled from its 2025 peaks, recent data from the Office for National Statistics shows it persists at 3.2%, keeping the Bank of England from committing to a clear easing cycle. This contrasts with the US, where the economy has shown more resilience, allowing the Federal Reserve more flexibility.

Volatility Strategy Considerations

Given this backdrop, we should anticipate that implied volatility for GBP/USD will remain elevated compared to the calmer periods before 2025. Traders should consider strategies that profit from price swings, such as long straddles or strangles, particularly ahead of key data releases or renewed geopolitical headlines. The memory of last year’s sudden 0.50% daily drops underscores the risk of being caught in a purely directional, unhedged position. For those with a bearish outlook on Sterling, buying GBP/USD put options offers a defined-risk way to position for further downside. We recall that the pair found temporary support around 1.3350 in 2025, so we should view strike prices below that level as potential targets in the coming weeks. This approach allows us to capitalize on any repeat of risk-off sentiment without exposing ourselves to unlimited losses. To mitigate costs and reflect the technical view from 2025 of a “mildly bearish” trend, we can use bear put spreads instead of buying puts outright. By selling a lower-strike put against a purchased put, we can finance the position and define a clear profit range. This is a prudent strategy if we believe a decline is likely but will be corrective rather than a complete collapse. However, we must also remember the longer-term rising support line noted in the 2025 analysis, which was then rooted at 1.3035 and now sits closer to 1.3200. Should the pair test this significant trendline, we should be prepared to shift strategies, possibly by selling cash-secured puts or initiating bullish positions. This level has historically provided a floor for Sterling, suggesting any deep declines may present a buying opportunity within the broader structure. Create your live VT Markets account and start trading now.

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The United States ISM Manufacturing Prices Paid index rose above forecasts in February. The forecast was 59.5, while the actual reading was 70.5. The higher reading points to increased input price pressure for manufacturers during the month. It shows that prices paid by manufacturers rose faster than expected.

Renewed Inflation Pressure

The February ISM prices paid data came in much hotter than anyone expected at 70.5. This suggests the input cost pressures we saw easing through much of 2025 are flaring up again. It directly challenges the idea that inflation is on a smooth path back to the Fed’s target. We believe this print effectively takes the possibility of a March rate cut off the table and puts a potential hike back into the conversation. Looking back, the market got ahead of itself pricing in multiple cuts this year, similar to the exuberance we saw in late 2023 before the Fed pushed back. Traders should consider positions that benefit from higher short-term rates, such as selling SOFR futures, as the market reprices the Fed’s path. This persistent inflation, especially after January’s CPI ticked up to 3.1%, creates a strong headwind for equities. We anticipate increased volatility, as the CBOE Volatility Index (VIX) has already climbed over 15% in the past week to 16.2. Hedging long stock portfolios with put options on the S&P 500 and Nasdaq 100 seems prudent until the inflation picture clears up. A more hawkish Federal Reserve outlook is typically bullish for the U.S. dollar. The “higher for longer” rate narrative should support the dollar index, which has recently broken through the 105 level for the first time this year. Furthermore, with recent reports of renewed supply chain strains raising shipping costs by nearly 20% in the last quarter, this data could signal a sustained floor for industrial commodity prices.

Market Implications Ahead

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The US ISM Manufacturing New Orders Index fell to 55.8 in February. It was 57.1 in the previous reading. The drop in new manufacturing orders to 55.8, while still showing expansion, signals a clear slowdown in the rate of growth. This deceleration is a key piece of information, suggesting that the economic momentum we saw at the start of the year might be fading. We should interpret this not as a sign of contraction, but as a potential turning point that warrants caution.

Implications For Fed Policy

This cooling data point reduces the pressure on the Federal Reserve to maintain its hawkish stance on interest rates. Following the latest jobs report which showed wage growth moderating to a 3.8% annual rate, this ISM figure strengthens the case for a pause in rate hikes. Consequently, we should be looking at options on interest rate futures that would profit from the Fed turning more neutral or dovish. We have seen this pattern before, particularly during the manufacturing soft patch in mid-2025. That period was marked by increased market volatility as traders priced in a weaker economic outlook. That slowdown preceded a brief 6% correction in the S&P 500, highlighting the sensitivity of equities to signs of decelerating growth. Given this context, positioning for an increase in market volatility seems prudent over the next few weeks. The VIX is currently trading near 14.5, a historically low level which presents an attractive entry point for buying call options or VIX futures. These positions would act as a hedge against a potential market downturn triggered by further signs of economic weakness. For equity index traders, this is a signal to consider protective strategies. Buying put options on the SPDR S&P 500 ETF (SPY) or selling out-of-the-money call spreads can provide downside protection. The industrial sector, which is most sensitive to manufacturing data, may underperform the broader market, making it a candidate for bearish pair trades.

Commodities And Dollar Watch

The slowdown could also impact commodity markets, particularly industrial metals like copper, which recently hit a 52-week high of $4.15 per pound. A continued trend of slowing orders suggests future demand may weaken, creating a potential opportunity to short copper futures. A weaker growth outlook could also put downward pressure on the U.S. dollar as rate hike expectations diminish. Create your live VT Markets account and start trading now.

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The United States ISM Manufacturing PMI for February came in at 52.4. This was above expectations of 51.8. A reading above 50 indicates expansion in manufacturing activity. A reading below 50 indicates contraction.

Manufacturing Momentum Continues

The February manufacturing report came in stronger than we expected at 52.4, which suggests the economy has solid momentum. This number points to continued expansion in the industrial sector. It reinforces the idea that the economic resilience we saw in the last quarter of 2025 is carrying over into the new year. This strong data makes it less likely the Federal Reserve will cut interest rates in the near future. We already saw the market price out a March rate cut after January’s jobs report showed a robust gain of 215,000 positions. This new manufacturing strength will likely push expectations for the first rate cut further out, possibly into the third quarter. For equity traders, this suggests looking at call options on industrial and materials sector ETFs, which benefit directly from manufacturing strength. However, we should be cautious with broad market index futures, as the prospect of interest rates remaining higher for longer could limit upside. This is a similar pattern to what we observed last fall when strong data repeatedly delayed the Fed’s anticipated pivot. In the interest rate markets, this data supports positions that anticipate higher yields. Traders might consider options that gain from a decline in Treasury bond prices, as the market adjusts to a more hawkish Fed. The upcoming February inflation report next week will be the next major catalyst, and another firm reading would solidify this trend. This economic outperformance should also continue to support the U.S. dollar. We could see further strength against the Euro, especially since recent European manufacturing PMIs have hovered just below the 50-point mark, indicating contraction. Call options on the dollar index or put options on the Euro could be a way to trade this divergence.

Positioning Across Markets

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The ISM Manufacturing Employment Index for the United States measured 48.8 in February. The previous reading was 48.1. The February manufacturing employment number came in at 48.8, which is an improvement from January but still below the 50 level that separates contraction from growth. This tells us that the rate of job losses in the manufacturing sector is slowing down. We see this as a sign of stabilization rather than a signal of renewed strength.

Federal Reserve Policy Implications

This reading is unlikely to pressure the Federal Reserve into changing its current stance on interest rates. With core inflation trending near 2.5% over the last quarter, this lukewarm employment data gives them cover to remain patient. Traders should not expect this single report to trigger any hawkish commentary from the central bank. For broad market index options like the S&P 500, this “less bad” news supports strategies that benefit from stability or a slow upward grind. Selling out-of-the-money put spreads could be a viable approach in the coming weeks. This capitalizes on the idea that while growth isn’t explosive, a major downturn is less likely. We also anticipate this will keep market volatility suppressed. The VIX has been trading in a tight range between 14 and 17 for most of 2026 so far. A report like this, which removes some worst-case scenarios, could cause volatility to drift toward the lower end of that range. This data is reminiscent of the slowdown we saw in mid-2025, when manufacturing numbers stayed below 50 for a full quarter before recovering. During that period, the market looked past the immediate weakness in anticipation of a recovery. We believe a similar dynamic could be at play now, with the market focusing on the direction of the trend.

Treasury Yield Outlook

In the bond market, this report should keep a lid on any sharp rise in Treasury yields. Traders in 10-year note futures might view this as confirmation that the economy is not running hot enough to warrant higher rates. We would expect yields to remain range-bound following this news. Create your live VT Markets account and start trading now.

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Martin Kocher, Governor of the Österreichische Nationalbank and an ECB member, said in a Wall Street Journal interview on Monday that the ECB should be ready to move interest rates quickly in either direction. He said uncertainty has risen since the start of the year, which means the key rate could be lowered again.

Rates Volatility Outlook

He said disruption to oil markets or shipping through the Strait of Hormuz could raise costs and push inflation higher. He said policymakers will consider currency movements, but they will not have a decisive effect on interest rate decisions. We are seeing clear signals that the central bank is prepared to move interest rates quickly in either direction. This outlook is increasing volatility, and we have seen the implied volatility on 3-month Euribor options jump nearly 12% over the last month. Traders should anticipate wider price swings in government bond futures. The possibility that the key rate will be lowered is growing due to increased uncertainty since the start of the year. Last week’s flash PMI data for February 2026 showed a worrying slowdown in the services sector, which supports the case for a preemptive rate cut. We saw a similar dynamic in late 2025 when weak data prompted the market to price in easing before the bank confirmed its dovish stance.

Positioning For Two Way Risk

However, a sudden spike in inflation could force a rate hike. Recent tensions in the Strait of Hormuz have already pushed Brent crude prices back towards $90 a barrel, and last month’s Eurozone HICP inflation report showed energy costs rising for the first time in four months. This creates a tangible risk that cost pressures could accelerate quickly. Given these strong opposing forces, strategies that profit from a large move in any direction are prudent. We believe using derivatives like long straddles on short-term interest rate futures is a logical approach. This allows a trader to benefit from a significant policy shift, whether it is a cut or an unexpected hike. Policymakers will take account of currency moves, but they will not have a decisive impact on rate decisions. This suggests the traditional correlation between rate expectations and the euro’s value may weaken. Therefore, using EUR/USD options as a direct proxy for ECB policy could be a less reliable strategy in this environment. Create your live VT Markets account and start trading now.

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Commerzbank said higher oil prices are lifting inflation and could reduce euro area GDP growth this year by more than 0.1 percentage points. It linked the slowdown to higher petrol and diesel costs and to higher costs for firms. The bank said consumers may cut spending on goods and services produced in Europe when fuel prices rise. It also said business costs could increase, which may further weigh on activity.

Oil At 100 USD Scenario

Commerzbank said the impact would be stronger if oil rose to 100 USD. It added that models point to a catch-up effect next year if oil and petrol costs fall again. The bank said the rebound could also be supported by shifts towards less energy-intensive goods and services. It added that the estimate comes with a high degree of uncertainty. The article stated it was created with the help of an artificial intelligence tool and reviewed by an editor. Looking back, the analysis from last year correctly anticipated that rising oil prices would act as a brake on the Euro area economy. We saw this play out in the final quarter of 2025, as consumer spending faltered when Brent crude flirted with $95 per barrel. Businesses clearly felt the pinch from higher costs, which contributed to the flat GDP growth we saw reported for that period.

Positioning For A Catch Up Effect

Now, with oil prices having retreated to the low $80s, the environment is shifting, and we must position for the predicted catch-up effect. The latest Eurostat flash estimate showed February’s headline inflation easing to 2.4%, which reduces pressure on consumers and supports the idea of a modest recovery. This situation suggests exploring call options on consumer discretionary stocks and ETFs that were beaten down during the energy price spike of 2025. The high degree of uncertainty noted in the original forecast remains a key factor, making volatility a tradable asset. With the European Central Bank holding rates steady but markets pricing in potential cuts by mid-year, buying straddles on the EURO STOXX 50 index could be a prudent strategy. This allows traders to profit from a significant market move in either direction as the economy either recovers faster than expected or falters again. Given the focus on energy, we should also consider plays related to the adjustment effects within the economy. Derivative strategies could involve setting up pair trades, such as buying puts on energy-intensive industrial companies while simultaneously buying calls on technology or service-sector firms. This capitalizes on the structural shift towards less energy-dependent business models that was accelerated by last year’s price shock. The next few weeks will be critical for watching incoming data, particularly the purchasing managers’ indexes, for confirmation of this fragile recovery. Options on EURIBOR futures are another key area, as they provide a direct way to trade expectations for the ECB’s rate path. We should use options to define our risk carefully, as the models suggesting a rebound are still facing the reality of a complex global economic picture. Create your live VT Markets account and start trading now.

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The S&P Global Manufacturing PMI for the United States was 51.6 in February. Forecasts had put it at 51.2. The reading was 0.4 points above expectations. A PMI figure above 50 indicates expansion.

Implications For Economic Momentum

The manufacturing purchasing managers’ index reading of 51.6 shows the sector is expanding faster than we anticipated. This positive surprise suggests a stronger underlying economy than previously modeled. For us, this points towards continued corporate earnings strength, particularly in the industrial and materials sectors. This data builds on other recent positive signals we’ve seen. The latest jobs report for February 2026 showed a gain of 215,000 payrolls, with manufacturing adding a solid 20,000 jobs. Furthermore, January’s retail sales figures posted a 0.7% increase, confirming that consumer demand is holding up and supporting factory orders. Given this backdrop, we should consider strategies that benefit from upward market momentum and declining volatility. The Federal Reserve is less of a concern now than it was in the past, with the latest CPI data holding steady at 2.9%. This means strong economic news is less likely to trigger fears of an interest rate hike. This environment feels very different from what we experienced back in 2023 and 2024. During that period, we remember how strong economic data often caused the market to sell off in fear of the Fed’s reaction. Now, with inflation apparently under control, good news can finally be interpreted as just good news for the market.

Potential Options Positioning

A straightforward response is to look at buying call options on broad market indices like the S&P 500 or specific industrial sector ETFs. These positions will profit if this economic strength translates into higher equity prices over the next several weeks. This allows for leveraged upside exposure with a defined risk. We can also look at selling put options with near-term expiration dates. This strategy collects premium and benefits from a market that is stable or trending upwards. The strong PMI reading reduces the perceived probability of a sudden economic downturn, making this a more attractive risk-reward proposition for us. This economic stability is reflected in market volatility expectations. The VIX has been hovering in a low range, recently trading near 14.2, which is significantly below its long-term average. We might consider positions that profit from this low-volatility regime continuing, such as shorting VIX futures or using option spreads. Create your live VT Markets account and start trading now.

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US oil shares rose in Monday premarket trading after Iran attempted to close the Strait of Hormuz. About 20% of global oil supply moves through the strait. West Texas Intermediate (WTI) jumped more than 7% to above $72. This was its highest level since a 12-day war against Iran began in June 2025.

Energy Stocks Jump On Supply Fears

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) climbed 5% in premarket trading. Individual energy stocks also rose, including APA and Occidental Petroleum at 7%. Exxon Mobil gained 5% and Chevron added 4%. The moves came as oil prices rose on concerns about reduced supply. OPEC increased daily oil output by 411,000 barrels a day. This followed the disruption risk linked to the Strait of Hormuz. China’s strategic reserves and possible International Energy Agency oil stock releases were cited as possible sources of extra supply. US oil production was also expected to increase in the coming weeks.

Options Get Expensive As Volatility Surges

With the market reacting to the Strait of Hormuz closure, volatility is now the most valuable asset. The Cboe Crude Oil Volatility Index (OVX) has surged above 55, a level we haven’t seen since the conflict last summer in 2025, making options on crude futures and energy stocks extremely expensive. This suggests that simply buying puts or calls will be costly, so more defined strategies are needed. For those expecting the conflict to escalate, we see this as an opportunity to use call options on the most sensitive producers like Occidental Petroleum. Buying near-term call options on OXY or the XOP ETF provides a leveraged bet that crude prices will continue to climb in the coming weeks. Given the 7% premarket jump, this is a direct play on continued geopolitical tension. However, we remember how the June 2025 conflict was sharp but short-lived, with prices retracing after two weeks. The WTI futures curve has already snapped into steep backwardation, indicating traders expect this supply crunch to ease in the coming months. A bull call spread would be a prudent way to capture further upside while capping costs due to the high implied volatility. This elevated volatility also makes selling premium an attractive, albeit risky, strategy for those who believe the situation will stabilize. Selling cash-secured puts on a robust major like Chevron (CVX) allows us to collect a high premium, with the view that the stock will not fall significantly below current levels. We note that implied volatility on XOP options is now trading at a 30% premium to its 30-day historical volatility, suggesting options are richly priced. Recent tanker tracking data shows that while OPEC announced a production increase, actual loaded barrels are only up by about 250,000 per day so far, less than promised. We have also seen the Baker Hughes rig count tick up for three consecutive weeks in the Permian Basin, but bringing new US production online takes time. This lag between announcements and actual supply suggests prices will remain supported for at least the next month, favouring short-term bullish positions. Create your live VT Markets account and start trading now.

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