Rabobank strategists restated that they expect the Federal Reserve to cut interest rates again this year. This comes as US Treasury yields moved higher amid ongoing inflation concerns.

The update also covered plans for the next Fed Chair and whether Jerome Powell may stay on the Federal Open Market Committee (FOMC) after his term as Chair ends. If Powell leaves the FOMC, it would create another vacancy.

Justice Department Drops Powell Renovation Inquiry

The report said the Department of Justice is dropping a criminal investigation linked to Powell and renovations at the Federal Reserve. After this, Tillis withdrew his objection to nominee Warsh receiving a Senate vote.

Markets are expected to watch on Wednesday for any indication on whether Powell intends to remain on the FOMC. The note added that if a new seat opens up, markets may expect a slightly dovish effect on the FOMC.

It also stated that, despite progress towards Trump’s preferred candidate for Fed Chair, US Treasury yields rose as attention stayed on inflation risks. It noted there was little concrete news on a Middle East peace deal.

It remains our view that the Federal Reserve will likely cut rates, but the timing is now in serious question. Persistent inflation is the main obstacle, and the market is adjusting its expectations accordingly. This creates a difficult environment where the direction of policy is clear, but the trigger for it is not.

Market Focus Shifts Back To Inflation

Looking back to 2025, we saw how political developments, like the discussions around Chair Powell’s future and potential replacements, added a layer of uncertainty. At that time, the possibility of a new Fed appointment led the market to price in a slightly more dovish outlook. This shows how sensitive rate expectations are to the leadership at the central bank.

Today, while that specific political situation has resolved, US Treasury yields are ticking higher, reflecting the same inflation fears we saw back then. With recent core Consumer Price Index (CPI) data from early 2026 showing inflation still stubbornly above 3.5%, the market is focused on the data rather than political guidance. This echoes the “higher for longer” sentiment that dominated much of the landscape through 2024.

For derivative traders, this points toward positioning for continued uncertainty in interest rate futures. Using options strategies on Treasury ETFs can be a way to profit from volatility without betting on a specific direction for rates. The market is very sensitive to each new inflation report, creating opportunities for short-term trades around those data releases.

Traders should also watch the forward rate agreement market, which is now pricing in a lower chance of a rate cut before the end of summer. This suggests the smart money is betting on the Fed waiting longer than previously hoped. Hedging strategies using interest rate swaps to protect against floating-rate risk seem more important than ever in the weeks ahead.

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April consumer price data for the euro area is due this week, with national releases from Wednesday and the flash euro HICP on Thursday.

The April figures are expected to show a rise in headline inflation mainly driven by energy prices, alongside a temporary fall in core inflation.

Ecbs Near Term Rate Outlook

Based on this backdrop, the ECB is expected to keep rates unchanged this week, with a rate rise seen as premature.

ECB projections outside the severe scenario, which assumes oil at $145 per barrel, do not clearly point to a need for rate increases.

Middle East tensions remain unresolved, and concerns about price pass-through may still lead the ECB to raise rates in June.

We expect the ECB to maintain a balanced hold this week, as the upcoming April inflation figures will likely be driven by energy prices. This temporary spike in the headline number, with core inflation dipping, gives them room to wait. This provides a clear setup for the more important June meeting.

Markets Focus On June Repricing Risk

With Eurozone inflation still elevated at 2.6% in March 2026, the situation remains tense. Brent crude oil trading near $95 a barrel, up significantly over the past month, makes the risk of a pass-through to core prices a real concern for policymakers. This justifies their cautious but alert stance.

The main play for us in the coming weeks is centered on the unresolved risk of a June rate hike. Derivative markets are only pricing in about a 40% chance of a move, suggesting there is room for repricing based on new data or geopolitical events. This discrepancy creates opportunities in short-term interest rate futures and options.

We should not underestimate the ECB’s willingness to act, as we saw during the aggressive hiking cycle that began in mid-2022. That period showed us that once inflation expectations become a concern, policymakers can move quickly and decisively. A “precautionary hike” in June would fit this pattern if Middle East tensions do not ease.

Consequently, we are seeing increased interest in options that expire after the June meeting, particularly in the EUR/USD pair. Buying volatility through structures like straddles or strangles could be a prudent way to position for a potential surprise. A precautionary hike would likely strengthen the euro, while a continued hold could see it weaken if inflation data softens.

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EUR/USD has moved back towards the middle of its 1.1400–1.2000 range, which has held since June last year. The pair peaked at 1.1849 on 17 April after reversing earlier losses linked to the Middle East conflict.

Over the past week, EUR/USD and EUR/GBP fell below 1.1700 and 0.8700, respectively. The move followed weaker euro-zone PMIs and the impact of higher energy prices.

Strait Of Hormuz Risks

US–Iran talks aimed at reopening the Strait of Hormuz have not progressed, leaving the route closed. A longer closure is expected to increase disruption from the energy price shock for the euro-zone economy.

The ECB has set out three scenarios for the euro-zone economy: baseline, adverse, and severe. The ECB President placed current conditions between baseline and adverse, while noting energy prices have not risen enough to match the adverse case and European natural gas prices remain below the baseline.

The ECB is expected to deliver 50 bps of rate rises in total, with the first move delayed until June. This implies short-term policy divergence with the Fed, while narrowing yield spreads have supported the euro and reduced dollar strength.

Given the renewed volatility in global energy markets, we see parallels to the situation that unfolded last year. The euro is again facing headwinds as rising oil prices, now over $95 a barrel due to shipping disruptions in the Red Sea, threaten the Eurozone’s energy-import-dependent economy. Recent German factory orders for the first quarter of 2026 have also fallen by 0.8%, echoing the economic weakness we saw in 2025.

We recall how a similar energy shock in the spring of 2025, following the Strait of Hormuz crisis, pushed EUR/USD back from its peak above 1.1800. That period demonstrated the euro’s sensitivity to geopolitical events in the Middle East and the subsequent drag on the region’s PMI data. History suggests that prolonged energy price shocks tend to hit the Eurozone economy harder than that of the United States.

Options Positioning And Volatility

The European Central Bank is likely to react with caution, just as it did in 2025 when it delayed its first rate hike until June of that year. Current market pricing shows investors have pushed back expectations for the next ECB rate cut to late in the fourth quarter, while the Federal Reserve maintains a hawkish stance. This policy divergence is creating a challenging environment for the euro.

For derivative traders, this points toward positioning for range-bound trading with a downside bias for EUR/USD. The current dynamic resembles 2025’s, but with a widening US-German yield spread, now at 160 basis points, providing less support for the euro than before. Selling call options with strike prices above 1.0950 could be a viable strategy to capitalize on a capped upside.

Alternatively, the heightened uncertainty suggests an increase in volatility may be coming. One-month implied volatility for EUR/USD has already climbed from 6% to 7.5% over the past few weeks. Purchasing a straddle, which involves buying both a call and a put option at the same strike price, could prove profitable if the currency pair makes a sharp move in either direction.

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GBP/USD traded near 1.3565 on Monday, up 0.23%, as the US Dollar weakened amid stronger risk appetite. This followed reports of an Iranian proposal to reopen the Strait of Hormuz and end the conflict with the US.

The US Dollar fell as market participants moved away from safe-haven positions. Attention is also on the Federal Reserve decision on Wednesday, with expectations for no rate change in the 3.50%–3.75% range.

Uk Outlook Ahead Of Boe

In the UK, markets are cautious ahead of the Bank of England meeting on Thursday. A hold at 3.75% is expected, with core inflation easing as CPI excluding volatile items rose 3.1% year on year in March, down from 3.2%.

There is still division on the Monetary Policy Committee. Chief Economist Huw Pill pointed to the need for tighter conditions to curb inflation, while Governor Andrew Bailey said no immediate change is needed despite recent shocks.

The Pound has been supported by repricing of rate expectations linked to resilient growth and persistent inflation. Domestic political risks in the UK may limit further gains, while central bank guidance and Middle East developments remain key drivers.

Given the improving risk sentiment, we are seeing short-term strength in GBP/USD, but the key events this week are the central bank meetings. Implied volatility for the pair has noticeably increased, with 1-month options pricing in larger swings than we saw last month, climbing from 7% to over 9.5%. This suggests traders are positioning for a breakout rather than continued calm.

Volatility Strategies And Event Risk

The Bank of England’s expected hold at 3.75% comes with significant internal division, creating uncertainty. While the 3.1% core inflation figure from March is a relief, we recall that headline CPI for February 2026 ticked up to 3.3%, keeping pressure on the more hawkish members. Traders might consider using options strategies like straddles to profit from a potential post-meeting spike in volatility, regardless of the direction.

On the other side of the pair, the Federal Reserve is also expected to stay on hold, which has kept the US dollar subdued. The recent Non-Farm Payrolls report from March, which showed a solid but not inflationary gain of 215,000 jobs, supports this wait-and-see approach. This environment suggests that any dollar weakness may be limited unless the Fed provides surprisingly dovish guidance on Wednesday.

The positive geopolitical news from the Middle East is providing a temporary boost to risk assets like the pound. However, we must balance this against the rising domestic political risks in the UK that have been flagged as a potential headwind. This conflict suggests that while call options on GBP/USD look attractive now, purchasing some downside protection through puts could be a prudent hedge.

We remember from the rate hiking cycle in 2025 that the pound’s initial strength often faded as concerns about the UK’s economic resilience took over. A similar pattern could emerge if the Bank of England sounds worried about growth, even while holding rates steady. Therefore, selling covered calls against existing long positions above the 1.3600 level could be a strategy to capitalize on the current optimism while acknowledging the potential for a limited upside.

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USD/JPY has traded in a narrow range in April, at about two yen, despite multiple global risks. The pair faces potential price swings around the Federal Reserve and Bank of Japan (BoJ) policy meetings, alongside upcoming data and geopolitical concerns.

Market pricing reflects low volatility in USD/JPY, despite the clustering of risk events this week. The scenario includes attention on whether these events could trigger a breakout from recent levels.

Bank Of Japan Hike Risk Underpriced

For the BoJ meeting, the risk of a rate rise is described as underpriced. There is also focus on the possibility of upward revisions to BoJ inflation forecasts.

If there is no surprise BoJ hike, and if US policy signals support the dollar while oil prices stay high, USD/JPY may break higher. Levels cited include 160.50 as this year’s high and 162 as the 2024 high.

A move towards 162 could coincide with higher traded volatility and the prospect of Japanese foreign exchange intervention. The article notes it was produced with the help of an artificial intelligence tool and reviewed by an editor.

The current quiet in USD/JPY is unsettlingly familiar, with the pair holding a tight range near 165.20 despite the upcoming central bank meetings. Volatility has collapsed, as the CME’s JPY/USD CVOL index has fallen to just 7.5%, a level not seen since late last year. This low volatility feels like a coiled spring, creating an ideal environment for a sharp breakout.

Options Pricing Signals Cheap Breakout Exposure

Looking back at 2025, we saw a similar setup where the market underestimated the Bank of Japan. Today, the risk of a surprise rate hike from the BoJ seems similarly underpriced, especially after last week’s Tokyo Core CPI hit 2.8%. This marked the 25th consecutive month above the BoJ’s 2% target, giving them plenty of reason to act more decisively than expected.

With implied volatility this depressed, buying options is unusually cheap right now. We believe traders should consider purchasing out-of-the-money call options to profit from a potential breakout toward 168 if the BoJ remains passive. These options offer a defined-risk way to capture a sharp upward move driven by ongoing policy divergence with the Fed.

Conversely, the risk of a sharp downside move is also significant, fueled by either a surprise BoJ hike or direct currency intervention. We all remember the Ministry of Finance stepping in with nearly ¥9.8 trillion in April and May of 2024 when the pair first crossed 160. Buying puts can be an effective hedge against long positions or a direct bet on a repeat of that scenario.

This setup is amplified by the Federal Reserve, which is expected to maintain its hawkish stance due to persistent US services inflation. The fundamental driver for a stronger dollar against the yen remains firmly in place. Therefore, even a small disappointment from the BoJ could be the catalyst for a significant and rapid rally.

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US equities stayed at record highs even as oil prices rose. US futures were mixed, while the US dollar was slightly weaker and bonds were also weaker.

Markets focused on upcoming central bank decisions, large technology earnings, and stalled US-Iran talks. Trading was driven by a quiet weekend and positioning ahead of policy announcements, starting with the Bank of Japan tomorrow.

Key Market Drivers

The US dollar and oil were cited as the main market drivers. Short-term interest rates were tracking inflation and growth data as markets waited for guidance from the Federal Reserve and other central banks on the global energy supply shock.

Kevin Warsh’s nomination to chair the Federal Reserve was referenced, with attention on the confirmation process. No change in market relief was reported from that development.

We are seeing the S&P 500 trading at record highs above 6,200, but this strength is not reflected in the US dollar, which remains soft. This is happening despite West Texas Intermediate (WTI) crude oil staying stubbornly above $95 per barrel, a persistent pressure point since the supply disruptions we saw in late 2025. The market seems to be waiting for a clear signal before making its next major move.

The two key cards in the deck for us right now are the dollar and oil, as they directly influence inflation expectations. The most recent Consumer Price Index (CPI) report showed inflation at 3.8%, which is keeping pressure on the Federal Reserve. We are closely watching growth data to see if these high energy prices are starting to slow down the economy.

Positioning Ahead Of Central Bank Decisions

With the next Fed meeting just over a week away on May 6th, implied volatility remains relatively low, with the VIX index currently near 16. This suggests that options are comparatively inexpensive, creating a window to position for a significant market swing following the central bank announcements. We think this is an opportunity to look at strategies that benefit from a spike in volatility, such as straddles on key currency pairs or oil futures.

Given the precarious height of the equity markets, hedging strategies should be a priority. Buying put options on major indices can provide downside protection against an unexpectedly hawkish Fed or another shock in energy prices. We recall how quickly sentiment shifted during the rate uncertainty in 2025, making it prudent to prepare for a similar scenario.

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Brent crude rose back above $100 per barrel amid rising geopolitical risk. The move comes before a War Powers Resolution vote on 29 April linked to Operation Epic Fury.

The vote will decide whether the operation moves into an unauthorised phase. The 60-day constitutional limit is due to end on 1 May.

Geopolitical Risk Drives Brent Above One Hundred

US actions are focused on keeping operational freedom beyond that date. Risks cited include a dual blockade in the Strait of Hormuz and stalled Pakistan-mediated US–Iran ceasefire talks.

Market pricing reflects the chance of a drawn-out conflict that could keep 20% of global oil supply under threat. It also reflects the possibility of a diplomatic route before a Trump–Xi summit in China in mid-May.

With Brent crude back over $100 per barrel, we see the market pricing in significant geopolitical risk. The immediate focus is the War Powers Resolution vote on April 29, which will determine if Operation Epic Fury continues, directly impacting the dual blockade threat. This creates a binary event for traders, where the outcome will likely cause a sharp price move in either direction.

Implied volatility has surged, with the oil volatility index, or OVX, hitting 55, a level not seen since the major supply disruptions of 2022. This indicates the options market is anticipating daily price swings of $4 to $5 per barrel over the next month. Buying options is therefore expensive, so traders should consider strategies like call spreads to bet on higher prices while capping costs.

Positioning And Hedging Into The Vote

The potential blockade of the Strait of Hormuz puts nearly 21 million barrels per day, or 20% of global supply, at risk. We can look back to the 1990 Gulf War, when a similar supply threat caused crude prices to more than double in just over two months. This historical precedent validates the market’s current anxiety and the high premium baked into prices.

In the derivatives market, we are seeing a record skew towards upside calls, meaning bullish bets are far outpacing bearish ones. The price for a $120 call option for June delivery is now at its highest premium over a $90 put in three years. This shows that while traders are positioned for a price spike, the trade is becoming crowded and vulnerable to a sharp reversal.

While preparing for a prolonged conflict, we must also account for a potential diplomatic off-ramp, especially with the presidential summit in mid-May. A surprise de-escalation ahead of the May 1st deadline could rapidly pull the risk premium out of the market. Traders holding long positions should therefore have clear targets for taking profits or use protective puts to guard against a sudden peace dividend.

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The New Zealand Dollar rose against a weaker US Dollar for a second day on Monday. NZD/USD moved above 0.5900 after rebounding from about 0.5840 on Friday, and traded above 0.5910.

Market participants reacted to reports of a possible US-Iran de-escalation. Axios reported that Tehran sent a peace proposal to the US, including reopening the Strait of Hormuz and delaying nuclear talks.

Near Term Technical Outlook

Near-term technical signals were positive, with the RSI around 60 and the MACD histogram slightly above zero. Resistance levels were cited near 0.5930, then 0.5965 (March 10 high) and about 0.6015 (February 26 high).

Potential support was noted around 0.5860, ahead of 0.5840 (Friday’s low). A break below 0.5840 would shift focus towards about 0.5800 (April 13 low).

Looking back at the situation in April 2025, the bullish sentiment for the Kiwi was driven by expectations of a Reserve Bank of New Zealand (RBNZ) rate hike and geopolitical de-escalation. That divergence in monetary policy, with the Fed on hold, created a clear trading signal. This fundamental backdrop suggested that long positions in the New Zealand Dollar against the US Dollar were favorable.

That policy divergence ultimately played out, with the RBNZ hiking its Official Cash Rate twice in 2025, while the Fed held steady before eventually cutting rates in early 2026. Today, the interest rate differential continues to favor the Kiwi, with the RBNZ rate at 6.0% and the Fed Funds Rate at 5.00-5.25%. New Zealand’s latest Q1 2026 inflation data, while cooling, remains sticky at 3.5%, reinforcing the idea that the RBNZ will be the last to cut rates among major central banks.

Strategy And Risk Management

Given this context, we see value in positioning for further NZD/USD strength in the coming weeks. A straightforward strategy is buying NZD/USD call options with a July 2026 expiry date. This allows us to capture potential upside while defining our maximum risk to the premium paid for the options.

We should consider strikes around the 0.6250 level, slightly above the current spot price of approximately 0.6180. This position benefits from both the positive carry of holding the Kiwi and the potential for further appreciation if US economic data continues to soften. The primary risk remains a sudden hawkish shift from the Federal Reserve, which seems unlikely given recent US labor market reports.

To manage this risk, we can recall the rapid currency market reversals seen during the central bank pivots of 2022. Acknowledging that conditions can change quickly, pairing long call positions with a smaller purchase of out-of-the-money put options could hedge against an unexpected downturn. This provides a buffer if global risk sentiment sours or if the RBNZ unexpectedly signals a dovish turn.

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EUR/GBP made a lower high near 0.8740 in early April and has struggled to stay above its 200-day moving average. Price action resembles a Head and Shoulders pattern.

The neckline is around 0.8610 and is acting as key support. A break below 0.8610 could open moves towards 0.8560/0.8535 and then 0.8475.

Technical Setup And Key Levels

A rise above 0.8740 would negate the bearish setup. The article was produced with the help of an AI tool and checked by an editor.

We are seeing signs of weakness in the EUR/GBP exchange rate, which has failed to hold above its 200-day moving average. The price action is forming what looks like a Head and Shoulders pattern, a classic signal of a potential trend reversal to the downside. This formation comes after the pair made a lower peak near 0.8740 earlier in April.

This technical setup is supported by recent economic data that points to a diverging path for monetary policy. Inflation in the Eurozone continues to cool, with the latest flash estimate for April 2026 showing a drop to 2.1%, increasing the likelihood of an ECB rate cut this summer. In contrast, UK wage growth data from last week came in hotter than expected at 4.3%, suggesting the Bank of England will need to keep rates higher for longer.

For derivative traders, this points toward strategies that profit from a fall in the euro relative to the pound. A break below the key support level, or neckline, around 0.8610 would be the trigger to consider buying put options. These options would gain value as the EUR/GBP rate declines toward the projected targets.

Options Strategy And Risk Management

Looking back, we saw a similar sharp decline in the pair during the second half of 2025 when it broke below a multi-month support level, so we are watching this neckline carefully. The first downside targets to watch on a break are 0.8560 and 0.8535. A more significant drop could even push the pair towards 0.8475 later this quarter.

The risk to this bearish view is a rally back above the 0.8740 level. A move above this recent high would invalidate the Head and Shoulders pattern. Traders using options might therefore consider selling out-of-the-money call spreads above this level to collect premium while defining their risk.

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China’s commerce ministry has criticised the EU’s proposed Industrial Accelerator Act and filed comments on 24 April. It said the plan includes discriminatory provisions against foreign investors.

China said the measures breach World Trade Organization principles, including most favoured nation and national treatment rules. It said they could undermine fair competition and investor confidence.

Trade Tensions And Policy Risk

Germany’s consumer climate for May weakened, with the GfK headline indicator falling to -33.3 from -28.1 in April. This was a 5.2-point drop and the lowest reading since February 2023.

Economic expectations fell to -13.7. The data cited higher energy prices and geopolitical tensions linked to Iran as factors affecting the Euro area outlook and EUR/USD.

The combination of trade friction with China and a sharp drop in German consumer confidence suggests a bearish outlook for European assets. We should consider buying put options on the EUR/USD, as the currency is likely to weaken further from its current levels around 1.05. Looking back, similar weak sentiment readings in 2025 preceded a period of economic sluggishness, which the European Central Bank may now have to counter with a more dovish policy stance.

This weakness in Germany, the Eurozone’s economic engine, points to trouble for European equities. The DAX index is particularly vulnerable given its heavy weighting of exporters who rely on Chinese markets, which accounted for a significant portion of their sales last year. We believe purchasing puts on the DAX or a broader European index like the STOXX 600 is a prudent strategy to hedge against a potential downturn in corporate earnings.

Volatility And Rates Positioning

Geopolitical tensions involving Iran and trade disputes create uncertainty, which is a key driver of market volatility. This environment makes buying call options on the VSTOXX, Europe’s main volatility index, an attractive proposition. When we saw a similar increase in Middle East tensions in late 2024, the VSTOXX index surged over 30% in a matter of weeks, indicating how quickly sentiment can shift.

The poor economic data will likely force the European Central Bank to reconsider any hawkish policy leanings. The market is now pricing in a higher probability of an interest rate cut before the end of the year, a noticeable shift from just a month ago. Therefore, we see an opportunity in interest rate derivatives, such as buying German Bund futures, to capitalize on falling yields.

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