Deutsche Bank economists said the Federal Reserve kept interest rates unchanged in March, with the target range at 3.50%–3.75%. They still forecast a 25 basis point cut in September.
They said markets expect limited easing, with around 6 basis points priced in by year-end. This implies a 24% probability of a rate cut.
Hormuz Blockade Risk
They warned that a prolonged blockade of the Strait of Hormuz could push Brent crude towards USD 120 per barrel. They noted that such an energy shock could affect inflation.
US inflation has risen to 3.3%. Their forecasts put 2026 growth at 2.5% and 2026 inflation at 3.4%.
They said weaker labour market conditions would support a rate cut. They also said an inflation rise linked to higher energy prices could lead to a rate rise.
With the Federal Reserve holding interest rates at 3.50%-3.75% last month, the market is pricing in only a 24% chance of a rate cut this year. We, however, continue to forecast a quarter-point cut in September. This difference in outlook presents a clear opportunity for traders in the coming weeks.
Trading Implications
We see an opportunity in interest rate futures, as the market has not fully priced in our September rate cut expectation. The latest jobs report from early April showed non-farm payrolls slowing to 145,000, missing consensus estimates and supporting the case for a weakening labor market. Traders should consider positions that will benefit from a drop in rates later this year.
The primary risk to this view is a potential blockade of the Strait of Hormuz, which could push Brent crude toward $120 per barrel. Recent maritime reports indicate heightened naval activity in the region, making this a tangible threat. Looking back at the tensions in mid-2025, we saw a brief 18% spike in oil prices from a similar, though less severe, situation.
A sustained oil price shock would complicate the Fed’s path, as current US inflation is already at 3.3%. An energy-driven surge in prices could force the central bank to delay cuts or even consider a hike, despite a cooling labor market. Therefore, buying long-dated call options on crude oil or energy sector ETFs could serve as an effective hedge against this major risk.
Given these opposing forces, volatility is likely underpriced across markets. With the VIX index hovering near a relatively low 15, options are not expensive. Establishing long volatility positions through straddles on major indices could prove profitable, as the market will likely have to move sharply once the Fed’s direction becomes clearer.
