Isabel Schnabel, a European Central Bank (ECB) member, spoke at the 2026 United States Monetary Policy Forum in New York on Friday. She said the ECB is still in a good position, but the Iran war has added upside risks to inflation. She said a small and temporary inflation overshoot would matter little if inflation expectations stay anchored. She also pointed to lessons from the post-pandemic period and said policy should be handled with care.

Inflation Risks And Central Bank Caution

Schnabel said the ECB must remain vigilant. She said it should monitor inflation expectations, wage trends, and whether firms pass higher costs on to prices. We need to take seriously the new upside risks to inflation. The Iran war means we should position for the European Central Bank to be more hesitant about cutting interest rates in the coming months. This changes the calculus for any trades that were betting on a straightforward easing cycle this year. The immediate impact is on energy prices, creating a direct shock to inflation forecasts. Brent crude has already jumped over 15% in the last month to over $95 a barrel, and shipping costs through key trade routes are surging. This is reminiscent of the supply shocks we saw in early 2022, which taught us that central banks have to react forcefully. For interest rate traders, this suggests reducing bets on imminent rate cuts. We should consider positions that benefit from rates staying higher for longer, such as paying fixed on interest rate swaps or selling EURIBOR futures for the later part of the year. The lessons from the high inflation of 2022 and 2023, as we saw it from our 2025 perspective, show that being early to call the peak of inflation can be a costly mistake.

Positioning For Higher Volatility

Volatility is now a key asset to own. With geopolitical uncertainty and unpredictable central bank policy, we should expect wider market swings. The Euro Stoxx 50 Volatility Index (VSTOXX) has already climbed to a six-month high near 22, and buying call options on the index or other volatility-linked products could provide a valuable hedge. This new hawkish risk from the ECB could also strengthen the euro relative to other currencies whose central banks face fewer direct inflationary pressures. The EUR/USD exchange rate has already ticked up to 1.10 from 1.08 in the past week as markets reprice policy expectations. We should look at buying call options on the euro to capitalize on potential further strength. In equity markets, the focus on firms potentially passing on higher costs is a warning sign for corporate profit margins. This creates an opportunity to purchase protective put options on major European indices like the German DAX. Such a strategy would shield portfolios from a market downturn if these inflation fears begin to weigh on economic growth and company earnings. Create your live VT Markets account and start trading now.

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