European inflation fears heat up with oil surge — short the Euro and Pound on rate hike bets
Oil prices are jumping because of the new conflict in the Middle East, and that is making traders worry inflation will come back. Because of that, they are betting the Bank of England and the European Central Bank will raise interest rates rather than cut them.
Idea
When oil prices spike, it acts like a tax on consumers and businesses, which usually slows the economy down. However, if it drives inflation up too fast, central banks are forced to raise interest rates to cool prices, which strengthens their currencies. With traders pricing in rate hikes for both the Eurozone and the UK, the Euro and Pound could see a short-term bounce against other currencies. This trade looks to profit from that currency strength by buying the Euro against the US Dollar, though it depends on whether the European banks actually follow through with the hikes.