Middle East conflict affects the US economy through higher oil prices, weaker household portfolios, and rising uncertainty. These can raise inflation, lift yields via expectations, and reduce output through a negative supply shock.<\/p>\n
Market volatility can lower consumer wealth and curb spending, while higher fuel costs can cut real incomes. Unstable conditions can also delay business planning, investment, hiring, and other decisions.<\/p>\n
Before the outbreak of hostilities, markets priced in just over two US Federal Reserve rate cuts by year-end. Since then, pricing has moved to well under two cuts, pointing to less dovish expectations.<\/p>\n
The Federal Reserve is also dealing with sticky inflation and waning labour demand. BNY expects three rate cuts this year.<\/p>\n
The ongoing conflict in the Middle East is creating a negative supply shock for the U.S. economy. We see this hitting through higher oil prices, which are currently keeping Brent crude futures hovering around $98 a barrel, and through general market uncertainty. This situation complicates the path forward for interest rates.<\/p>\n
The Federal Reserve faces a dilemma between persistent inflation and slowing growth. The latest Consumer Price Index report for February showed inflation remains stubborn at 3.1%, leading many in the market to scale back rate cut expectations. In fact, Fed funds futures now imply only a 40% chance of a second rate cut by December.<\/p>\n
However, we believe the focus should be on the weakening labor market, which will ultimately force the Fed\u2019s hand. The most recent jobs report showed a gain of only 150,000 nonfarm payrolls, missing forecasts, while the unemployment rate ticked up to 4.1%. We are therefore maintaining our view that three rate cuts are likely this year, contrary to current market pricing.<\/p>\n
For derivatives traders, this sets up an opportunity in interest rate futures. Options on SOFR futures that would profit from a drop in rates later this year appear mispriced relative to our outlook. Positioning for a steeper decline in the forward curve than the market currently anticipates could be a favorable strategy in the coming weeks.<\/p>\n
The broad economic uncertainty also suggests higher volatility ahead. The Cboe Volatility Index (VIX), which saw lows near 12 back in 2025, has been establishing a higher base recently. Traders should consider buying VIX calls or call spreads as a hedge against a sudden market downturn triggered by geopolitical events or a surprisingly weak economic report.<\/p>\n
In the energy sector, the elevated oil prices create a two-way risk. A sudden de-escalation could send prices tumbling, while a wider conflict could cause another major spike. Using options strategies like straddles on oil ETFs can allow traders to profit from a large price move in either direction while keeping risk defined.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Middle East conflict lifts US inflation risks via oil, volatility, uncertainty, reducing output and delaying Fed rate cuts.<\/p>\n","protected":false},"author":103,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-51095","post","type-post","status-publish","format-standard","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/51095","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/103"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=51095"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/51095\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=51095"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=51095"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=51095"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}