Joachim Nagel, President of the Bundesbank and an ECB policymaker, spoke to Bloomberg on Wednesday about risks linked to the Strait of Hormuz. He said the outlook sits between the ECB\u2019s baseline and adverse scenarios.<\/p>\n
He said there is not enough clarity about what will happen in April and that policymakers need to keep their options open. He added that two weeks could bring a lot of new information.<\/p>\n
Nagel said the situation developed a little better over the course of last week. He also said inflation expectations are well anchored, but that could still change.<\/p>\n
He said that as long as the situation around the Strait of Hormuz is not resolved, the risk of higher inflation is rising.<\/p>\n
The questions around the Strait of Hormuz are essential, placing us between a baseline scenario and a more adverse one. As we move through April, we need to maintain all optionality because two weeks can bring a lot of new information. The situation remains fluid, and market positioning should reflect this heightened uncertainty.<\/p>\n
This tension is already being felt in energy markets, where Brent crude has climbed over 8% in the past two weeks to trade above $95 a barrel. This is a direct result of increased risk premiums associated with the 30% of global seaborne oil that passes through the strait. We saw a similar, though more brief, price reaction during the tanker incidents in 2019.<\/p>\n
While inflation expectations are currently viewed as well anchored, this could change rapidly with sustained high energy prices. Eurozone core inflation has remained stubbornly above target at 3.1%, and this energy shock threatens to reverse the recent disinflationary trend. The danger of higher inflation is rising as long as the situation around Hormuz is not resolved.<\/p>\n
For derivative traders, this suggests buying protection against sharp upward moves in oil prices, such as out-of-the-money call options on WTI or Brent futures. Implied volatility in energy markets has risen, but it could go significantly higher if rhetoric escalates into action. Hedging now is more prudent than chasing a move later.<\/p>\n
This environment also calls for a reassessment of interest rate positions. Swaps markets have already pushed back expectations for an ECB rate cut from the third quarter to potentially not happening at all in 2026. Positioning for a “higher for longer” policy through paying fixed on interest rate swaps or buying puts on bond futures could protect portfolios from a hawkish pivot.<\/p>\n
We must remember the central bank playbook from just a few years ago in 2022, when policymakers were forced to react aggressively to an energy-driven inflation surge. That experience, combined with the difficulties we saw in bringing inflation down last year, makes them highly sensitive to the current risks. Their primary mandate is price stability, and they will likely prioritize that over growth concerns if oil prices stay elevated.<\/p>\n","protected":false},"excerpt":{"rendered":"
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