The US Dollar steadied on Tuesday after reversing Monday’s decline, as uncertainty over a US-Iran peace deal and the potential reopening of the Strait of Hormuz kept demand supported. The USD Index (DXY) rose to two-day highs above 99.00. On Wednesday, the MBA Mortgage Applications and the ADP Employment Change Weekly are due, while Fed officials Logan and Cook are scheduled to speak.
In G10, EUR/USD slipped back towards 1.1600 as Monday’s advance faded, with the ECB set to publish its Financial Stability Review (FSR). GBP/USD retreated after meeting resistance above 1.3500, and the UK calendar is blank. USD/JPY climbed towards multi-week highs near 159.30 ahead of remarks from BoJ Governor Ueda. AUD/USD hovered around 0.7170, with Australia due to release key inflation data alongside Construction Work Done and a speech from the RBA’s Hewson. WTI fell towards $89.00 per barrel, with the API’s weekly US crude stockpiles due Wednesday, while gold dropped to two-day lows and again tested $4,500 per troy ounce.
US Dollar Rally, Market Volatility, and Key Events
We see the US Dollar’s strength as a direct response to rising geopolitical risk in the Middle East. This flight to safety is pushing the Dollar Index towards the 99.00 level. The CBOE Volatility Index (VIX), a key measure of market fear, has reflected this nervousness, recently ticking up to 14.5 from its yearly lows.
We are positioning for a significant move in the Australian Dollar with the key inflation report due tomorrow. Australia’s last quarterly inflation figure was a stubborn 3.6%, so another high number could create serious volatility. We believe buying straddles or strangles on AUD/USD is a prudent way to trade the potential price swing, regardless of direction.
Currency Performance, Oil And Gold Market Reactions
The persistent weakness in the Japanese Yen is being driven by the massive gap between US and Japanese interest rates. With the Federal Reserve holding rates above 5% and the Bank of Japan near zero, the path of least resistance for USD/JPY remains upward. We must remain alert for any verbal or physical intervention from Japanese authorities as the pair approaches the 160.00 level.
We view the current weakness in WTI crude oil, now below $90 a barrel, as directly tied to hopes of a diplomatic breakthrough that could reopen the Strait of Hormuz. This is overpowering recent fundamental data, like last week’s 1.4 million barrel drawdown in US crude inventories reported by the EIA. Any confirmed reopening of the strait could trigger a further sharp drop in prices, making short-dated put options an interesting hedge.
Gold’s failure to rally on geopolitical news shows how powerful the strong US Dollar and high interest rates are right now. The US 10-year Treasury yield holding firm around 4.45% makes holding non-yielding gold very expensive for investors. We anticipate gold will remain under pressure as long as the dollar index stays elevated above the 99.00 mark.
