War pricing reversal! The euro has regained lost ground, but pound options are still warning of "extreme volatility."

In the options market, the pound appears to be more fragile than the euro. This sign indicates that even after the ceasefire in Iran, traders still believe that the UK is more likely to be affected by the surge in energy prices. Option data shows that the demand for hedging against significant fluctuations in the pound is still higher than the levels seen at the end of February when the conflict erupted. This is in stark contrast to the euro - similar indicators for the euro have already returned to normal levels. This difference is significant because it contradicts the initial market reaction to the conflict. In the first phase of the conflict, the euro fell by about 1.5% against the pound, reflecting the market's belief that the eurozone is particularly vulnerable to energy shocks. However, these declines have almost completely recovered since then. But in the options market, there are more persistent signs of distortion on the pound side. This does not mean that investors believe the eurozone will be immune to the impact of the conflict. On the contrary, they seem less willing to rule out the possibility of extreme volatility in the pound compared to the euro. This expectation is consistent with the overall economic background. Before the outbreak of the conflict, the UK's inflation rate was higher than that of the eurozone, making traders more sensitive to the risk of energy shocks that could continue to push up prices. Meanwhile, an analysis by the International Monetary Fund (IMF) shows that due to its reliance on gas-fired power generation, the UK is one of the European countries most affected by rising energy prices. The IMF also warns that energy shocks will increase living costs and lead to demands for higher wages from workers. Adam Linton, a macro strategist, said, "The euro may rise against the pound because the European Central Bank's expected hawkish response may be slower than that of the Bank of England. ECB policymakers may need more information before they can announce that the pressure of rising prices has been relieved. Nevertheless, the market is more inclined to expect the ECB to maintain the stability of deposit rates in the short term." Interest rate expectations also reflect a similar situation. The conflict has caused traders to shift from expecting rate cuts to betting on rate hikes for both the UK and the eurozone. However, given that traders originally expected the Bank of England to cut rates at least twice this year, the shift in rate expectations for the UK is much greater. Overall, these data suggest that the impact of the conflict is not limited to interest rates. Although the market has lowered the pricing for the most extreme outcomes of the conflict, option traders still believe that the pound faces greater risks than the euro.