The US dollar softened late on Thursday as risk sentiment improved on reports of a US–Iran Memorandum of Understanding to extend a ceasefire for 60 days, reopen the Strait of Hormuz and begin nuclear talks. The White House confirmed the reports while saying President Donald Trump had not yet approved them, and Iran’s Tasnim said the text was still neither finalised nor confirmed. Early Friday, the USD Index was steady around 99.00 and US stock index futures were marginally higher, with preliminary May CPI from Germany and Canada’s first-quarter GDP due, followed by speeches from several Federal Reserve policymakers.
US data offered a mixed backdrop: the BEA said April PCE inflation rose to 3.8% from 3.5%, while core PCE increased 3.3% and the monthly gains were 0.4% and 0.2% respectively. The agency also revised annualised first-quarter GDP growth down to 1.6% from 2%. Gold fell below $4,370 before ending higher and was above $4,520 on Friday; EUR/USD rose about 0.2% then slipped below 1.1650, while the ECB’s CES cited inflation around 2%. USD/JPY held above 159.00 after comments from Japan’s Chief Cabinet Secretary Minoru Kihara, GBP/USD stayed above 1.3400, and AUD/USD was slightly above 0.7150 after a 0.3% rise.
Geopolitical Developments and Market Drivers
We see the potential agreement between the US and Iran as the primary market driver, reducing geopolitical risk premiums. This suggests a weaker US Dollar and supports riskier assets in the short term. Derivative traders should consider reducing exposure to safe-haven trades that were banking on continued conflict.
This development directly impacts energy markets by reopening the Strait of Hormuz, through which about 21% of global petroleum liquids pass daily. We believe this places a significant cap on crude oil prices, making long positions in oil futures less attractive. Selling out-of-the-money call options on WTI or Brent crude could be a viable strategy to capitalize on this expected price ceiling.
Domestic Economic Dynamics and Asset Strategies
However, the domestic US picture is creating a major conflict for the Federal Reserve. The combination of high inflation, with the latest PCE reading at 3.8%, and slowing GDP growth, revised down to 1.6%, signals stagflation. This difficult environment complicates the Fed’s next move and could lead to market volatility if their upcoming speeches sound uncertain.
Due to the weak growth data, interest rate markets are now pricing in a less aggressive Fed than the inflation numbers would normally suggest. According to the CME FedWatch Tool’s logic, expectations for future rate hikes are diminishing, which helps explain the dollar’s recent weakness. We are positioning for a period where the Fed is forced to tolerate higher inflation to avoid damaging the economy further.
Gold’s rally above $4,520 is particularly noteworthy, as it suggests the market is focused more on inflation than the easing geopolitical tensions. The metal is behaving less like a safe-haven asset and more like a direct hedge against persistent inflation and a potentially dovish Fed. We are looking to maintain or add to long gold positions through futures or options.
This price action is reminiscent of past stagflationary periods where gold performed well even as other risk assets struggled. Recent data from the World Gold Council confirms that central banks globally have continued to be strong net buyers of gold, providing a solid floor for the price. This underlying demand reinforces our bullish view on the metal.
In foreign exchange, we are extremely cautious about being long USD/JPY near the 159.00 level due to the threat of intervention from Japanese authorities. The risk of sudden, sharp downward moves is elevated, making it prudent to hedge long dollar positions against the yen. Buying JPY call options could offer a cost-effective way to protect against this risk.
Finally, the easing Mideast tensions should push the CBOE Volatility Index (VIX) lower in the coming weeks from its recent highs. While this presents an opportunity to sell volatility by writing options on major indices, the underlying inflation risk in the US demands caution. We recommend strategies that profit from declining volatility but have a defined risk profile.
