Geopolitical Shock Drives Dollar Demand
CNN reported that US President Donald Trump said “a big wave has yet to come” in the war with Iran. US Secretary of Defense Pete Hegseth said the US is “not ruling out any options” and that “we fight to win”. The conflict raised concerns about oil supply through the Strait of Hormuz, which could lift energy prices and add to inflation pressure. This could affect central bank policy plans. ECB policymaker Martin Kocher said rates should be able to move “in either direction” if uncertainty grows. ECB’s Pierre Wunsch said policy could be reviewed if oil prices stay high. The US Dollar Index was around 98.64, its highest since 22 January. US ISM Manufacturing PMI was 52.4 in February versus 52.6 in January; Prices Paid was 70.5 versus 59.0, and Eurozone HCOB Manufacturing PMI was 50.8 in February, unchanged. Given the sharp escalation in US-Iran tensions, we believe the path of least resistance for EUR/USD is lower in the near term. Traders should consider buying put options on the EUR/USD pair, possibly targeting strikes around the 1.1600 or 1.1550 levels, to capitalize on further downside. Implied volatility has surged, making options more expensive, but the directional momentum toward the safe-haven dollar appears strong.Oil Shock Inflation And Policy Spillovers
The most direct consequence of this conflict is the threat to oil supplies, which adds a significant inflation risk globally. We saw Brent crude jump over 15% in just two days, a spike reminiscent of the supply shocks in early 2025 when prices briefly touched $105 per barrel. Long positions in oil futures or buying call options on energy ETFs are logical strategies to hedge against or profit from a sustained rise in energy costs. This situation strengthens the case for a hawkish Federal Reserve, which was already concerned about persistent inflation. With the US Manufacturing Prices Paid Index jumping to 70.5 and core inflation finishing 2025 at a stubborn 3.1%, the Fed has no incentive to consider rate cuts. The European Central Bank, however, faces a much tougher choice between fighting oil-driven inflation and supporting a weaker Eurozone economy. This growing divergence in central bank outlooks makes interest rate derivatives an active area. We are seeing traders rapidly unwind bets on Fed rate cuts using SOFR futures, with the market now pricing in a period of sustained high rates through the end of the year. The uncertainty surrounding the ECB’s response could lead to significant volatility in European rate markets. Overall risk appetite has been damaged, suggesting a defensive posture is warranted in equity markets. We anticipate continued pressure on major stock indices as geopolitical risk remains elevated. Purchasing put options on benchmarks like the S&P 500 can provide a valuable hedge as the VIX, a key measure of market fear, has already climbed above 24 for the first time this year. Create your live VT Markets account and start trading now.
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