Talk of a possible US–Iran peace deal has eased some pressure on the US dollar, yet the DXY index has remained resilient. Market sentiment has taken cues from softer energy prices in recent weeks, alongside expectations that a new 60-day arrangement could allow the Strait of Hormuz to reopen and Iranian oil exports to resume. However, the broader backdrop still reflects lost energy supply and the associated inflation shock, leaving the currency supported if oil shipments fail to normalise quickly.
Policy expectations are also underpinning the greenback. Short-dated US rates have moved lower, but markets continue to price 20bp of Federal Reserve tightening this year, and that view may prove difficult to unwind ahead of next Wednesday’s FOMC meeting, which will include an updated statement and forecasts. Against this mix, DXY is expected to find support around 99.50, even with a hawkish ECB tone and improved ceasefire prospects in the Gulf.
US Dollar and Options Market Strategy
We are looking at the US Dollar Index holding firm despite peace talk chatter. With solid support seen near the 99.50 level, selling out-of-the-money put options on dollar futures or ETFs could be a prudent way to collect premium. This strategy profits if the dollar stays above this floor in the coming weeks, which we expect.
Energy Prices, Inflation, and Federal Reserve Outlook
The softness in oil markets seems fragile, and we believe the real risk is a price spike heading into July if Iranian supply doesn’t materialize. The latest WTI crude price around $88 a barrel doesn’t fully reflect the risk of the Strait of Hormuz remaining a chokepoint. We think buying medium-term call options on crude oil is a smart hedge against a sudden inflationary shock.
With the latest core CPI data still running hot at 3.8%, the Federal Reserve’s job is not done. The market, according to the CME’s FedWatch Tool, is pricing in a high probability of another rate hike this year, which we don’t see changing at next week’s meeting. This suggests short-dated interest rate futures will remain under pressure, making bearish bets on them a consistent position.
This environment reminds us of past periods where geopolitical energy risks collided with an inflation-focused central bank. Historically, such a combination tends to provide a strong tailwind for the dollar, as it becomes a safe haven against both global instability and inflation. Therefore, we view any dips in the dollar as potential buying opportunities, especially ahead of the upcoming FOMC.
