Focus On Fed And ECB Decisions
Markets are focused on upcoming policy decisions from the Federal Reserve on Wednesday and the European Central Bank on Thursday. Both are expected to keep interest rates unchanged. The Fed is expected to hold rates steady as the oil-price jump linked to the Strait of Hormuz has pushed inflation expectations away from prior levels. CME FedWatch data indicates expectations that the Fed will keep rates unchanged across another four policy meetings. The ECB is also expected to keep rates steady, with price pressures remaining close to the 2% target for a sustained period. Looking back at the situation in late 2025, we saw the US Dollar strengthen due to geopolitical risks and a spike in oil prices. The EUR/USD was under pressure around 1.1415 as both the Fed and ECB were expected to hold interest rates steady. This created a period of uncertainty where defensive positioning was key.Shifting Macro Backdrop
That risk-off sentiment has since eased, and the conflicts that pushed Brent crude above $110 per barrel in late 2025 have cooled. As of this morning, Brent is trading closer to $85, significantly reducing the inflation threat that kept the Federal Reserve on hold. This changes the entire landscape from what we were anticipating just a few months ago. With the oil threat diminished, the focus is now back on core inflation, which has fallen to 2.8% in the latest US CPI report. This has shifted market expectations, and the CME FedWatch Tool now indicates a nearly 70% probability of a Fed rate cut by July 2026. We’ve seen this pattern before, where the Fed pivots quickly once an external inflation shock subsides. Meanwhile, the European Central Bank faces a different problem with recent data showing Eurozone economic growth slowing to just 0.4% annually. While their inflation is stable at 2.3%, the sluggish growth puts immense pressure on the ECB to consider cutting rates sooner than the Fed. This growing policy divergence is a major theme for us moving forward. Given this divergence, we see potential weakness in the EUR/USD pair. Traders should consider buying put options on the EUR/USD to position for a potential decline. Specifically, options with a strike price around 1.0950 expiring in the third quarter of 2026 could offer a favorable risk-to-reward profile. Create your live VT Markets account and start trading now.
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