Fed Guidance And Market Pricing
Markets are watching Jerome Powell’s guidance on inflation risks linked to rising Oil prices. Only about 25 basis points of rate cuts are priced in by year-end, down from more than 50 basis points before the US-Iran war. CME FedWatch data suggests the Fed stays on hold through April, June and July. September is seen as the most likely time for a cut, with a probability of about 50.8%. The Fed’s updated Summary of Economic Projections and dot plot are also due. In the Eurozone, the ECB decides on Thursday and is expected to keep all three key rates unchanged. Higher Oil prices may slow Eurozone growth and keep inflation higher, due to reliance on energy imports. Before the conflict, markets expected the ECB to hold through 2026, but pricing now points to a possible hike as early as July.Eurozone Inflation And ECB Outlook
Eurozone inflation data due on Wednesday is also in focus ahead of the ECB decision. Looking back at the situation in 2025, the market was bracing for central bank responses to the US-Iran war and the resulting oil shock. We saw expectations for Federal Reserve rate cuts almost disappear, while traders began pricing in a surprise hike from the European Central Bank. This set the stage for a significant policy divergence that played out over the subsequent months. The Fed, facing persistent inflation driven by those energy costs, ultimately had to hike rates further in late 2025 to a peak of 4.50%. With the latest US inflation report for February 2026 showing CPI has cooled to 3.1%, traders should now consider positioning for the start of an easing cycle. Options strategies that benefit from falling interest rates, such as buying calls on Treasury note futures, are becoming more attractive. The European Central Bank was forced to follow with a rate hike of its own in 2025 to combat the severe energy-led inflation, given Europe’s import dependency. However, Eurozone inflation has remained stickier, with the February 2026 figure at 2.6%, making an imminent rate cut from the ECB far less likely than for the Fed. This divergence suggests traders could use derivatives to bet on a widening interest rate differential between the US and Europe. As a result of the Fed’s more aggressive policy and a resilient US economy, the EUR/USD pair, which traded near 1.15 during the 2025 conflict, is now hovering around 1.0750. Implied volatility has shifted from being driven by geopolitical risk to being centered on the timing of central bank policy pivots. Therefore, traders should consider using options to position for further dollar strength against the euro, as the Fed appears closer to cutting rates than the ECB. Create your live VT Markets account and start trading now.
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