Major currency pairs opened Monday close to Friday’s closes, with markets largely discounting reports of renewed Middle East tensions. Attention later turns to the US calendar, where the ISM Manufacturing PMI for May is due, as the USD Index hovered around 99.00 in the European morning and US stock index futures were marginally higher.
On Friday, Donald Trump said the US would lift the blockade and allow ships in the Strait of Hormuz to begin “heading home”, adding he would hold a meeting to make a final call on a possible Iran deal, a claim Iran’s Fars News rejected. The BBC reported late Sunday that Trump is seeking changes to the Strait of Hormuz and the removal of enriched uranium in an MOU; meanwhile, the US military said it struck Iranian radar and drone sites in Goruk and on Qehm, and Iran’s Islamic Revolutionary Guard Corps said on Monday it had targeted a US air base in response. Gold slipped towards $4,500 after two days of gains, while EUR/USD traded around 1.1650, GBP/USD held above 1.3450, USD/JPY near 159.50, NZD/USD eased to about 0.5970 after topping 0.6000 on Friday, and AUD/USD stayed below 0.7200.
Mispricing Of Geopolitical Risk And Volatility Hedging Opportunities
The market’s calm response to escalating tensions in the Middle East looks like a significant mispricing of risk. This presents an opportunity to position for a potential spike in volatility in the coming weeks. We believe buying protection through options is prudent, as the current low volatility makes such strategies relatively cheap.
Energy, Precious Metals, And Currency Safe Havens
With the Strait of Hormuz being a critical chokepoint, any further escalation poses a direct threat to global energy supplies. Given that historically about 20% of the world’s seaborne oil passes through this strait, the risk of an oil price shock is high. We are looking at out-of-the-money call options on Brent crude futures as a cost-effective way to gain upside exposure.
Gold’s pullback toward $4,500 offers an attractive entry point for long positions, as geopolitical uncertainty historically drives capital into precious metals. Similarly, the high level of USD/JPY around 159.50 seems vulnerable to a risk-off move that would strengthen the yen. We are considering buying put options on USD/JPY to speculate on a flight to safety.
While the US Dollar Index is currently stable around 99.00, we expect it to strengthen if the situation deteriorates, acting as a primary safe-haven currency. Today’s ISM Manufacturing PMI data will be a key test; a recent survey from S&P Global showed US manufacturing output contracting for the first time in four months, so a weak ISM reading could accelerate a flight-to-quality.
