Dollar Demand Rises On Geopolitical Risk
Iran’s Islamic Revolutionary Guard Corps said it launched a joint operation with Lebanon’s Hezbollah against targets in Israel, Jordan, and Saudi Arabia. The report followed the most intense US-Israeli bombardments on Iran on Tuesday and pointed to a further escalation in the conflict between Israel-US forces and Iran. Looking back at the Middle East hostilities in 2025, we recall how the sharp flight to safety benefited the US Dollar. That event established a clear pattern of dollar strength during major geopolitical flare-ups, pressuring pairs like GBP/USD. This memory should guide our strategies, as markets now price in a higher risk premium for regional instability. In the coming weeks, we should anticipate that underlying volatility will remain elevated. This makes hedging with options a sensible approach, particularly buying put options on GBP/USD to protect against a sudden downturn. Data shows that during the 2025 crisis, one-month implied volatility for the pair jumped by over 30%, and while it has settled, it remains above the five-year average. The policy divergence between central banks will also be a key driver. With the US Federal Reserve signaling a more hawkish stance to curb persistent inflation, which sits at 3.1% as of last month’s data, the dollar has a fundamental tailwind. In contrast, the Bank of England is grappling with a weaker UK growth forecast of just 0.5%, making it less likely to match the Fed’s tightening cycle.Energy Markets And Portfolio Hedging
We must also consider the impact on energy markets, given the regions involved in last year’s conflict. Brent crude futures, which spiked to over $110 a barrel during the 2025 escalation, are sensitive to any new developments. Holding long positions in crude oil call options could therefore act as an effective portfolio hedge against a repeat of those events. Create your live VT Markets account and start trading now.
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