US CPI inflation rose to 3.3% year on year in March, up from 2.4% in February and matching expectations. Monthly CPI increased 0.9%, following a 0.3% rise in February.
Core CPI, which leaves out food and energy, rose 0.2% month on month and 2.6% year on year. After the release, the US Dollar Index was down 0.15% at 98.65.
Inflation Expectations And Oil Shock
Ahead of the report, forecasts were for CPI at 3.3% year on year and 0.9% month on month, with core CPI at 0.3% and 2.7%. The outlook linked higher inflation to rising oil prices after a US-Israel strike on Iran.
Since 28 February, West Texas Intermediate (WTI) was up about 40% even after a two-week ceasefire was announced. In March, WTI rose nearly 50%, from about $67 a barrel to near $100 by month-end.
Markets priced about a 75% chance of the Fed keeping rates at 3.5%–3.75% by year-end, versus 17% on 9 March. EUR/USD levels cited were 1.1730, 1.1800, 1.1900, with support at 1.1650, 1.1560, and 1.1500.
Trading The Volatility Regime
The recent March inflation report confirmed what we already suspected, with the headline number jumping to 3.3% year-over-year. This was driven almost entirely by the conflict-related surge in oil prices that began in late February. The core inflation figure, however, is the one to watch, as it sits at a stubborn 2.6%.
This creates a difficult situation for the Federal Reserve and a major opportunity for us. While West Texas Intermediate crude oil has pulled back slightly to around $92 a barrel this week, it remains far above the pre-conflict levels of early 2025, which were consistently below $75. This sustained high price suggests the headline inflation number will not fall back quickly.
The key takeaway for the coming weeks is to trade the uncertainty itself. The CBOE Volatility Index (VIX) is currently elevated near 21, reflecting the market’s anxiety over a potential re-escalation in the Middle East. This level of tension is a stark contrast to the relative calm we experienced throughout most of 2025.
We should be looking at options on interest rate futures to position for the Fed’s next move. The CME FedWatch Tool now shows a 9% chance of a rate hike by September, a probability that was zero just two months ago. A strangle strategy, buying both an out-of-the-money call and put, could pay off if the Fed is forced into a surprise decision either way.
The energy market is the most direct way to trade the geopolitical risk. Implied volatility on WTI options is high, but call options offer a defined-risk way to profit if the ceasefire fails and oil spikes above $100 again. Conversely, if a lasting peace deal emerges, put options would gain value as crude prices fall.
Currency markets, particularly EUR/USD, will also be sensitive to these dynamics. The dollar could strengthen significantly if persistent energy inflation forces the Fed to become more hawkish than the European Central Bank. We can use options on EUR/USD to position for a potential slide back toward the 1.1500 support level.
