US equity futures were cautious early Tuesday in the European session. S&P 500 futures fell 0.16% to near 7,160, while Dow Jones futures were flat slightly below 49,200.
Markets were subdued before the start of the Federal Reserve’s two-day policy meeting. The Fed is expected to keep rates at 3.50%–3.75% for a third meeting in a row, with attention on inflation and growth risks linked to the Middle East crisis.
Fed Decision In Focus
Traders are watching the policy statement and Jerome Powell’s press conference for rate guidance. CME FedWatch shows a 73.4% chance rates stay unchanged for the rest of the year, while the remainder expect a cut.
Focus later shifts to US Q1 2026 earnings from Visa and Coca-Cola. Corporate outlooks are also being watched against higher oil prices.
The Strait of Hormuz remains closed, affecting a route tied to almost 20% of global energy supply. The closure follows stalled US–Iran talks, adding pressure to earnings expectations.
Donald Trump discussed an Iran proposal with the national security team, according to the White House. The proposal includes reopening the Strait and a permanent ceasefire, with no details on next steps.
Market Volatility Outlook
With markets showing caution, we should watch the Federal Reserve meeting closely as it is Chairman Powell’s last. While the market has priced in a 73.4% chance of rates holding steady for the year, any change in tone from the Fed on inflation could spark significant movement. Looking back at the volatility surrounding the rate hikes of 2025, even a hawkish pause could be interpreted negatively.
The combination of the Fed meeting and Middle East tensions suggests higher volatility is likely in the coming weeks. The VIX, currently trading around 17, has room to climb, which makes buying options contracts for downside protection on broad indices like the S&P 500 a prudent strategy. Historically, we’ve seen the VIX index increase in the days leading up to such pivotal Fed decisions, reflecting the market’s need to hedge.
The continued closure of the Strait of Hormuz is keeping oil prices elevated, with WTI crude recently pushing past $105 per barrel. This situation presents opportunities to use call options on energy sector ETFs to gain upside exposure, while also considering put options on transportation and airline stocks that suffer from high fuel costs. We should not expect this pressure to ease until there is a clear diplomatic breakthrough between the US and Iran.
Later today, the earnings reports from Visa and Coca-Cola will offer a direct view of consumer health. We are seeing elevated implied volatility in the options for both companies, suggesting the market anticipates post-earnings price swings greater than 5%. Traders could consider strategies that profit from a large move in either direction, given the uncertain economic backdrop.
The end of the Powell era at the Fed introduces a new variable for the second half of the year. Any hints about his successor or a potential policy shift could create long-term trading opportunities. We should consider using longer-dated options to hedge against the policy uncertainty that will surely follow this transition.
