War Risk And Market Caution
Donald Trump said on Monday the war could end “very soon”, but no timeline was given. Iran’s IRGC said “it is we who will determine the end of the war” and warned ships about passing through the Strait of Hormuz. The conflict raised concerns about oil supply disruption and higher global inflation. Oil prices fell after Trump’s comments and reports that G7 countries are discussing a coordinated release of strategic oil reserves through the IEA. G7 ministers are holding talks on measures to stabilise energy markets. A release could push oil prices lower and reduce inflation pressure, but uncertainty remains high. ECB policymakers said rates should not be moved quickly. Martin Kocher urged monitoring, Madis Müller said the chance of a hike has risen, and Gediminas Šimkus warned a deeper crisis could affect inflation and growth. Markets expect the Fed to keep rates steady soon while pricing in cuts later. CME FedWatch shows a 57.2% chance of a first 2026 cut in July; US CPI is due Wednesday and PCE on Friday.Volatility Focus And Hedging
Given the cautious mood and the lack of follow-through on the EUR/USD’s recent rebound, we should prioritize strategies that profit from volatility. The market is clearly hesitant to take a firm direction while the US-Iran conflict’s outcome remains so uncertain. This indecision is reflected in the currency options market, where implied volatility for EUR/USD has ticked up over 8.5%, a level we haven’t consistently seen since the banking sector turmoil back in early 2025. The situation with crude oil is the main variable and a source of significant event risk for all markets. While we’ve seen Brent crude pull back from last week’s highs above $110 to around $98 a barrel on talk of a G7 strategic reserve release, this is temporary relief. Any disruption to shipping in the Strait of Hormuz could cause an immediate price spike, making long-dated call options on oil a viable hedge against a wider inflation shock. Central bank commentary is not providing any clear direction, which further supports a focus on volatility rather than direction. Both the ECB and the Fed are in a “wait and see” mode, creating a coiled spring effect ahead of key data points. We must pay close attention to the US CPI data this week, as a high inflation print could force the Fed to abandon its dovish tilt and put rate cuts for July in jeopardy, which markets are currently pricing at a 57.2% probability. Therefore, buying options straddles or strangles on EUR/USD futures ahead of this week’s US inflation reports could be a prudent move. This allows us to profit from a significant price swing in either direction without betting on the outcome of the data or the next headline from the Middle East. Looking at past events, we saw a similar dynamic during the initial phases of the Ukraine war in 2022, where volatility spiked dramatically before a clear trend emerged. Current positioning data shows that large speculators have trimmed both long and short positions in the euro, indicating widespread uncertainty. This lack of conviction from major players suggests that when a direction is finally established, the subsequent move could be sharp and sustained. Our goal is to be positioned for that eventual breakout, whichever way it goes. Create your live VT Markets account and start trading now.
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