US factory orders fell 0.7% month on month in December. Forecasts had pointed to a 1.1% rise. The result was below expectations. It shows orders fell over the month.

Factory Orders Surprise Signals Manufacturing Slowdown

Factory orders data for December 2025 showed an unexpected drop of 0.7%. Markets had expected a 1.1% gain. This miss points to a clear slowdown in manufacturing as we entered the new year. It also raises the risk of broader economic weakness, which can increase market volatility. Newer data supports this view. January’s ISM Manufacturing PMI stayed in contraction at 47.2. The January jobs report also came in weak, with 95,000 jobs added versus 180,000 expected. Together, these signals suggest the cooling was not limited to late 2025 and may be carrying into the first quarter of 2026. Inflation is also easing. January CPI was 2.8%, adding pressure on the Federal Reserve to rethink policy. The chance of an interest rate cut by mid-year is rising, which can make long-duration bonds and interest rate futures more appealing. Watch upcoming Fed speeches for any shift from fighting inflation toward supporting growth. Historically, several months of falling factory orders have often come before wider market downturns, including ahead of the 2008 recession. If that pattern repeats, it may be worth considering more defensive positioning. For example, put options on industrial sector ETFs or on the S&P 500 can help hedge against a deeper slowdown.

Volatility Strategies To Hedge Rising Uncertainty

Missing expectations by a wide margin increases uncertainty, and uncertainty often leads to higher volatility. In this kind of environment, buying VIX call options or using VIX futures can be a direct way to benefit if market fear rises in the coming weeks. These positions can also diversify a portfolio if equities start to trend lower. Create your live VT Markets account and start trading now.

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EUR/JPY traded near 182.50 on Monday, down 0.15%, as markets waited for Eurozone inflation data and policy signals from Japan. Traders stayed cautious ahead of key releases due on Wednesday. Germany’s IFO Business Climate Index rose to 88.6 in February, above the 88.4 expected, and up from 87.6 in January. The Current Assessment Index increased to 86.7 from 85.7, while the Expectations Index came in at 90.5, matching forecasts.

Eurozone Inflation And Growth In Focus

Focus now shifts to Eurozone core HICP inflation. It is expected to come in at 2.2% year on year in January, down from 2.3% in December. Headline HICP is seen steady at 1.7%. Germany’s fourth-quarter GDP is also due on Wednesday. In Japan, National CPI rose 1.5% year on year in January, down from 2.1% in December, and core measures also cooled. Markets priced the chance of a BoJ rate rise at the 28 April meeting at about 70%. EUR/JPY remains closely tied to interest-rate expectations in both regions. Softer Eurozone inflation could pressure the Euro, while clearer signs of a BoJ hike could support the Yen. This is a key moment for EUR/JPY. The next few weeks may be driven by different central bank paths. The events to watch are the Eurozone inflation report and any BoJ guidance ahead of the April meeting. This policy gap could create an opportunity for traders looking for a possible move lower in the pair.

Trade Setups And Options Positioning

Markets expect Eurozone inflation to ease. That would support the European Central Bank’s current “wait-and-see” stance on rates. After the rate cuts seen from the ECB through 2025, inflation staying below 2% would back a more dovish view. That may make the Euro less appealing, especially against a currency where the central bank may be moving toward tighter policy. At the same time, the Yen is supported by the strong chance of a BoJ rate hike in April. In March 2024, the BoJ ended its negative interest-rate policy, and markets have been watching for the next step since then. Japan’s Ministry of Finance data showed foreign investors turned into net buyers of Japanese government bonds in late 2025, which has also helped support the Yen. With that backdrop, one straightforward strategy is to buy EUR/JPY put options. This lets traders position for a decline while limiting risk to the premium paid. It may make sense to consider expirations after the late-April BoJ meeting to capture possible volatility around that event. For a lower-cost alternative, bear put spreads may be suitable. This involves buying a put at a higher strike and selling a put at a lower strike. Doing so reduces the upfront cost. This approach fits traders who expect a moderate drop in EUR/JPY rather than a sharp selloff. Implied volatility on EUR/JPY options is likely to be higher ahead of these releases, which makes option premiums more expensive. This reflects uncertainty and the risk of larger price swings after the inflation data and central bank signals. Traders should account for these higher costs when placing new positions. Create your live VT Markets account and start trading now.

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TD Securities says the key U.S. data this week are producer prices (PPI) and consumer confidence. It notes that January PPI will help shape forecasts for personal consumption expenditures (PCE) inflation. The firm expects February consumer confidence to rise to 85.5, up from 84.5 in January. It calls this a rebound, but says it would still be below the broader market expectation.

Key Inflation Signals Ahead

On inflation, it expects January core PCE to slow to 0.19% month on month, with headline PCE at 0.12%. It says this estimate is based on January CPI and will be updated after Friday’s January PPI release. After an upside surprise in December PCE, it now forecasts core PCE at 2.9% year on year and headline PCE at 2.7% year on year by end-2026. Other releases to watch this week include jobless claims and regional Federal Reserve surveys. The article notes it was created using an AI tool and reviewed by an editor. We expect inflation to stay stubbornly high, which could delay any near-term interest rate cuts. The stronger-than-expected December 2025 inflation report led us to raise our end-2026 forecast for core PCE to 2.9%, well above the Federal Reserve’s target. This suggests the Fed may keep policy tight longer than markets previously expected.

Positioning For Higher For Longer

This backdrop supports positioning for higher interest rates for longer. Derivatives trades may need to reflect fewer Fed rate cuts being priced into instruments such as SOFR futures through the rest of 2026. Options strategies that benefit from steady or rising bond yields may also work well, since returning to 2% inflation still looks difficult. At the same time, we see signs the consumer is under pressure, which complicates the outlook. Even if confidence rebounds to 85.5, that is still weak and far below the 100+ levels common before the pandemic. Because consumer spending drives about 70% of the U.S. economy, softer sentiment could weigh on corporate earnings. Sticky inflation plus a weakening consumer could lift market volatility, making hedges more appealing. Traders may consider put options on major indices such as the S&P 500 to protect against a slowdown. The VIX, hovering near 14, suggests the market may be underpricing the risk that upcoming data releases trigger turbulence. A similar pattern played out in 2024: early optimism about disinflation was followed by months of persistent price pressure. Weekly jobless claims have also inched up from their 2025 lows, now averaging around 235,000. This is not alarming on its own, but it supports the view that conditions are getting more challenging. Create your live VT Markets account and start trading now.

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ING expects EUR/USD to rise through the rest of 2026 as US short-term rates fall and US growth slows in the second half of the year. It forecasts two Federal Reserve cuts this year and says stronger Eurozone data should support the pair. The bank does not expect the US dollar’s 2026 decline to be as large as its 2025 drop. It highlights US risks such as high equity valuations, fiscal problems, and political uncertainty ahead of the midterm elections.

Year End Target And Hedging Dynamics

ING sets a year-end target of 1.22 for EUR/USD. It also notes that high dollar hedging costs have kept hedge ratios low. It describes last year’s EUR/USD hedging levels as underhedged, especially early in the year. Its base case assumes a 50bp Fed cut while the ECB keeps rates unchanged. That would lower dollar hedging costs. In this scenario, ING expects dollar hedge ratios to rise to about 74% by year-end. The article says it was created with an AI tool and reviewed by an editor. Because the outlook for the US dollar is bearish for the rest of 2026, we believe traders should consider positioning for a higher EUR/USD rate. This could mean taking long positions, such as using futures contracts or buying euro call options. Since ING expects a gradual rise, traders may prefer to build positions over time instead of making one large entry.

Policy Divergence And Trading Approach

This view is backed by recent data showing the US and Eurozone moving in different directions. Last week’s US January retail sales report showed a 0.5% drop, which points to weaker consumer demand. Meanwhile, Germany’s latest IFO Business Climate index rose slightly to 92.1, suggesting a slow recovery is starting. Together, these signals support the idea that momentum is shifting toward the Eurozone. We expect the Federal Reserve to start cutting rates around mid-year. Markets are pricing in about a 70% chance of a first 25bp cut at the June meeting. By contrast, the European Central Bank is expected to keep rates steady. This would narrow the interest rate gap and reduce support for the dollar. This policy split is the main reason behind the forecast for EUR/USD to rise. In 2025, the dollar weakened and EUR/USD climbed from about 1.10 to above 1.18. That move helped set up today’s environment. This year’s rise is expected to be slower, but the trend is still higher. As US short-term rates fall, the cost of hedging the dollar should drop. That can lead to more hedging activity, which may weigh on the dollar over time. Because the expected move is a steady “grind higher” rather than a sharp rally, EUR/USD implied volatility may stay fairly low. Traders could look at strategies that benefit from this, such as selling out-of-the-money puts to earn premium while keeping a bullish bias. This can fit a slow move toward the 1.22 year-end target, aiming to gain from both the direction and time decay. Create your live VT Markets account and start trading now.

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Euro area February 2026 inflation data is due this week for Belgium, France, Spain, Slovenia, Portugal, and Germany, with more releases next week. Nomura expects euro area HICP inflation to average slightly below the ECB’s 2.0% target in H1 2026, mainly because of energy base effects. For 2027 and 2028, Nomura sees risks tilted to the upside. The key drivers are a strong labour market, rising wage pressure, and GDP growth running above potential.

Medium Term Curve Steepening Opportunity

In Germany, Nomura says risks are lower than its forecast due to energy prices and the chance of more pass-through from lower electricity grid charges. At the same time, it flags services inflation as an upside risk. In France, the increase in February versus January is explained almost entirely by energy base effects. Downside risks come from a cut in regulated energy prices. For Spain, Nomura says risks are balanced. With key February 2026 inflation releases coming in, we expect prints to be slightly below the ECB’s 2% target. This is mostly a technical move driven by energy base effects, as inflation is now being compared with the early-2025 energy spike. This temporary dip could keep short-term rate expectations steady for now.

Options And Volatility Positioning

We see a risk that markets are focusing too much on this temporary disinflation and missing the pressures building for 2027. Eurostat’s latest data shows unemployment still at a multi-decade low of 6.4%, and the ECB’s wage tracker for Q4 2025 remains elevated at 4.1%. Along with GDP growth now expected to run above potential, these signals point to inflation pressure returning more strongly. This sets up an opportunity in rates to position for a steeper yield curve over the medium term. Traders could use interest rate swaps or futures to express a view that longer-term rates will rise more than short-term rates. In other words, current pricing for late 2027 and 2028 may not fully reflect the wage and growth pressures ahead. The gap between the near-term outlook and the longer-term inflation risks also points to higher uncertainty around central bank policy. That backdrop can support options strategies that benefit from higher interest rate volatility. Today’s calm market may be under-pricing the chance of a sharper policy debate later this year and into 2027. Create your live VT Markets account and start trading now.

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GBP/JPY edged lower on Monday. Trading was quiet because Japan had a market holiday and the UK had no major data. The pair stayed in its two-week range and was near 208.80 after dipping to 208.22. Sterling weakened as traders considered that the Bank of England could start cutting rates as early as March. This view is tied to softer labour-market conditions and easing inflation. BoE policymaker Alan Taylor said there are “two or three more cuts to go before reaching a neutral rate,” and warned about weak productivity and the risk of inflation falling below target.

Japan Policy And Inflation Backdrop

In Japan, sentiment remained cautious while markets weighed Prime Minister Sanae Takaichi’s support for fiscal stimulus, which could influence expectations for Bank of Japan policy. Inflation data released last week came in softer. National CPI rose 1.5% year-on-year in January, down from 2.1% in December. Core CPI (excluding food and energy) eased to 2.6% from 2.9%. CPI excluding fresh food slowed to 2.0% from 2.4%. Later this week, the UK has no major data scheduled. Japan, however, will release Tokyo CPI for February, plus January industrial production, large retailer sales, and retail trade figures on Friday. We recall that expectations for Bank of England easing drove sentiment in early 2025, but the picture has changed. While the BoE cut rates twice last year, late-2025 data showed core inflation staying firm at 3.4%, well above the 2% target. This has kept the BoE in a “wait and see” mode, pushing expectations for any further cuts back to the summer at the earliest. Meanwhile, the Bank of Japan has become even more cautious after exiting negative rates in mid-2025. With Japan’s latest national CPI for January 2026 at 1.9%, the BoJ has little reason to tighten further. The wide rate gap between the UK’s 4.75% bank rate and Japan’s 0.0% remains the main support for GBP/JPY.

Options Positioning For Policy Divergence

For derivatives traders, this policy split can make selling downside protection on GBP/JPY appealing in the weeks ahead. The pair has built strong support around 206.00. With the BoE currently on hold, selling out-of-the-money put options lets traders collect premium because a sharp fall looks less likely. Implied volatility on one-month options has dropped to a six-month low of 7.2%, suggesting the market expects the pair to stay stable. Focus now turns to upcoming UK wage data, a key driver of stubborn inflation. Another strong result above the recent 5.5% average annual growth could lead markets to remove expectations of rate cuts in 2026, which could lift the pair. Traders who want upside exposure could use call spreads to target a steady move higher, limiting maximum profit but also cutting the upfront cost. Create your live VT Markets account and start trading now.

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BBH says the US dollar started the week weaker after a US Supreme Court ruling on tariffs. However, it notes the move is not yet decisive. BBH remains structurally bearish because of fiscal and trade forces, but stays cyclically neutral because the USD is still tracking interest-rate differentials. BBH warns the ruling could weaken US fiscal credibility and increase trade frictions. It adds that these structural headwinds could push the USD below what rate spreads would normally suggest, as happened in Q2 last year.

Structural Risks Versus Rate Support

Fed funds futures are fully pricing in 50 bps of rate cuts by year-end. BBH links this pricing to weaker labour demand, fading upside inflation risks, and softer private-sector demand. BBH says the Federal Reserve can stay patient before cutting again. It points to an expected fiscal boost in Q1 from the One Big Beautiful Bill Act (OBBBA), no sign of a layoff spiral, and core services ex-housing PCE inflation holding between 3.2% and 3.4% since March 2025. The dollar has begun the week on a softer footing after the Supreme Court tariff ruling, which raises concerns about the US fiscal outlook and trade policy. This supports our long-term bearish view. For now, though, the dollar is still moving broadly in line with interest-rate differentials. That keeps our near-term view neutral and highlights a push-pull between structural weakness and cyclical support. The key risk is that structural issues could suddenly overwhelm rate support and drag the dollar lower. We saw a similar break in Q2 2025, when the dollar fell 4% even though US yields were attractive, because markets focused on the trade deficit. Traders should watch for another shift like this, where the dollar stops reacting positively to supportive rate news.

Trading Implications For The Dollar

Markets are confidently pricing in two full Fed rate cuts by the end of the year. That view is backed by clearer signs of cooling in the labour market. The latest JOLTS data show job openings have fallen to 8.2 million, the lowest since mid-2024. With inflation pressures also easing, the case for eventual rate cuts is strengthening. Even so, BBH argues the Fed can afford to wait, which could support the dollar in the weeks ahead. The large One Big Beautiful Bill Act is adding a meaningful fiscal boost to the economy, and the Fed’s preferred “supercore” inflation measure has remained sticky at around 3.3% since last year. That persistence gives policymakers a reason to delay cuts. For derivatives traders, this tension—future cuts priced in, but a Fed that is not rushing—suggests the dollar may stay range-bound. Expected easing can cap upside, while the Fed’s patience can help set a floor. That can make lower-volatility strategies, such as selling strangles on EUR/USD, more appealing. These trades assume the dollar will not break out decisively in either direction over the next few weeks. Create your live VT Markets account and start trading now.

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The Chicago Fed National Activity Index for the United States came in at -0.21 for December. The previous reading was -0.04.

Economic Growth Signals Turning Lower

The Chicago Fed National Activity Index fell to -0.21 in December 2025. This points to slower-than-average U.S. growth. It also suggests the economy may stay weak into the first quarter of 2026. We are preparing for more market swings and a more defensive stance. This view is supported by the January 2026 jobs report. Nonfarm payrolls rose by only 145,000, below expectations and the slowest pace in more than a year. Initial jobless claims have also edged up in recent weeks, averaging about 230,000. Together, these reports show that the slowdown seen at the end of 2025 is continuing into the new year. In response, we may consider buying put options on major stock indices such as the S&P 500. This can help protect against a market decline caused by weaker economic conditions. These positions tend to increase in value if stocks fall as investors react to slower growth. The chance of the Federal Reserve pausing, or even hinting at future rate cuts, has risen. The 10-year Treasury yield has dropped by almost 25 basis points over the past month to 3.65% as traders price in a more dovish outlook. We can also consider strategies that benefit from falling rates, such as call options on Treasury bond futures. We also expect volatility to rise from today’s relatively calm levels. The VIX, near 17, may not fully reflect the uncertainty ahead. Buying VIX call options can be a cost-effective way to hedge against a sudden jump in market volatility. In past slowdowns, such as 2015 and 2019, similar moves in the index came before choppy markets and a more dovish Fed shift. While a reading of -0.21 does not yet signal a recession, the negative trend from late 2025 is a warning. It makes sense to adjust our derivatives exposure for a weaker growth backdrop in the weeks ahead.

Positioning For Higher Volatility Ahead

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The Supreme Court’s 20 February decision struck down many administration tariffs. This cut the average effective tariff rate on U.S. imports from about 13.6% to 6.4%. The drop was temporary. After a proclamation last Friday, the President used Section 122 powers to apply a 15% tariff across the board. This pushed the effective rate back to about 12%, bringing back most of the earlier tariff burden.

Tariff Scope And Exemptions

The global 15% tariff only applied to goods that had already faced reciprocal tariffs. Exemptions stayed in place for USMCA-compliant products. Broader exclusions were also added for civil aircraft and parts. Some tariffs may be reduced, but a broad return to freer trade is unlikely. The U.S. is expected to adjust tariffs to keep leverage in negotiations and to avoid making debt projections worse. Legal and policy uncertainty also remains high. The quick shift from the Supreme Court ruling to the new White House 15% tariff confirms the administration’s protectionist stance. Last week’s brief dip in tariff rates looks like a short legal disruption, not a policy change. For the near term, betting on a return to lower tariffs is likely a losing strategy. Ongoing uncertainty also points to higher market volatility. During the first tariff escalations in 2025, the VIX jumped above 20, and Friday’s sudden reversal shows that playbook is still in use. For the next few weeks, buying protection or taking long volatility positions through options or futures may be a sensible approach.

Currency And Cross Border Implications

For currency traders, this strengthens the case for a strong, or at least stable, U.S. dollar as trade barriers stay high. However, the USMCA exemptions suggest a potential relative-value trade. The Mexican peso and Canadian dollar could outperform currencies that do not have similar access to the U.S. market. The government’s fiscal position also helps keep tariffs in place. January 2026 CBO projections show federal debt rising above 110% of GDP. That makes tariff revenue politically important. Last year’s tariff collections were close to $125 billion, and they are now a budget item the government will be reluctant to surrender. For equities, the focus should be on clear winners and losers. Derivative strategies may work best on companies with global supply chains—especially in retail and manufacturing—where margins are likely to stay under pressure. In contrast, the carve-out for civil aircraft and parts may support bullish positions in that narrower group of companies. Create your live VT Markets account and start trading now.

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The Chicago Fed National Activity Index rose to 0.18 in December, up from -0.04 the month before. That is an increase of 0.22 points (from -0.04 to 0.18). The index measures overall U.S. economic activity.

December Activity Rebound

The December 2025 reading showed a clear rebound in economic activity. The index moved from negative to a solid positive level. At the time, this suggested the economy was heading into the new year with stronger momentum than expected. It also eased worries about a sharp slowdown. More recent data has made the outlook less certain. January’s Consumer Price Index was hotter than expected at 3.3%, bringing inflation concerns back into focus. This has made the Federal Reserve’s next steps harder to predict. Markets are now less confident about rate cuts in the first half of the year. The strong growth seen at the end of 2025 may be helping keep prices under pressure. Q4 2025 GDP, reported last month, supported this late-year strength with 2.7% annualized growth. Even so, weekly jobless claims have risen for three straight weeks. This may be an early sign that the labor market is cooling in early 2026. Overall, the story is mixed: strong past data, but early hints of slowing ahead. For traders, this mix can mean higher volatility. Markets are weighing strong backward-looking data against weaker forward indicators. Strategies that can benefit from bigger moves—such as long straddles on the SPX—may be worth considering, especially since the VIX has risen from its January lows. With the data sending mixed signals, upcoming releases could still trigger sharp market reactions.

Rates Volatility Trading Focus

This uncertainty also affects rate expectations and can create opportunities in SOFR-linked derivatives. The MOVE index (a measure of bond-market volatility) has risen over the past two weeks, showing the market’s uncertainty about what the Fed will do next. In this environment, trading volatility may be more attractive than making a one-way bet on interest rates. Create your live VT Markets account and start trading now.

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