Early Tuesday trading was subdued as markets parsed Middle East headlines, with attention on Eurostat’s preliminary May Harmonised Index of Consumer Prices (HICP) for the Eurozone and the US JOLTS Job Openings report for April. After Iran’s negotiating team halted message exchanges via mediators with the US in protest over attacks on Lebanon, safe-haven demand lifted the greenback, pushing the USD Index up more than 0.2% on Monday. Oil also jumped, as West Texas Intermediate rose nearly 5% on threats to block the Strait of Hormuz and the Bab El-Mandeb Strait. US stock index futures were marginally lower in Europe, while the USD Index held slightly above 99.00.
In FX, EUR/USD rebounded towards 1.1650 after a prior negative close; annual HICP inflation is expected at 3.2% in May, up from 3% in April. GBP/USD held moderate gains above 1.3450 ahead of BoE Governor Andrew Bailey’s testimony. USD/JPY hovered near 159.70, after BoJ meeting minutes showed requests to pause or slow bond-purchase tapering from fiscal 2027. Gold recovered from a 1% Monday drop and traded above $4,500.
Impact of Geopolitics on Oil, Dollar, and Gold
We believe the immediate focus for derivative traders must be on oil volatility. Given that threats to the Strait of Hormuz could disrupt over 20% of the world’s daily oil supply, price spikes are highly probable. We are therefore acquiring out-of-the-money call options on WTI futures for the next 30 to 60 days to profit from this instability.
The US Dollar’s strength is a direct result of these geopolitical tensions, creating a classic risk-off environment. The back-and-forth nature of the US-Iran negotiations will fuel uncertainty, keeping the USD Index firmly supported above the 99.00 level. We see this as an opportunity to buy futures contracts on the US Dollar Index, hedging against further escalations in the Middle East.
Gold has re-established itself as the primary safe-haven asset, comfortably trading over $4,500 an ounce. This price reflects years of persistent global inflation and recurring political shocks, a pattern we saw solidify during the conflicts of the early 2020s. Consequently, we are adding to long positions in gold futures as a core portfolio hedge.
Currency Market Opportunities Amid Policy Divergence
While Eurozone inflation is elevated at 3.2%, we expect the dollar’s safe-haven status to overwhelm any strength in the Euro. The EUR/USD’s failure to hold gains points to underlying weakness. For this reason, we are buying put options on the EUR/USD pair, anticipating a move lower if Mideast tensions do not find a quick resolution.
The Japanese Yen continues to be weakened by the Bank of Japan’s dovish policy hints, keeping USD/JPY near the critical 160.00 level. Historically, even with intervention threats, fundamental policy divergence between the US and Japan drives this pair higher during times of stress. We are cautiously holding long USD/JPY positions, using call options to capitalize on further yen weakness.
