Risk Off Market Drives Dollar Demand
Reports said Tehran launched drone attacks on the US Embassy in Riyadh in response to a joint US-Israel operation that killed several senior Iranian leaders, including Supreme Leader Ayatollah Ali Khamenei. The shift away from risk also added pressure to the euro. US rate expectations also helped the Dollar, as the likelihood of the Fed holding rates in June rose to 53.5% from 42.7% on Friday, according to CME FedWatch. This followed the US ISM February report, where Manufacturing Prices Paid rose to 70.5 versus 59.5 expected and 59.0 previously. Eurozone inflation data were firmer than forecast, with headline HICP at 1.9% YoY versus 1.7% prior. Core HICP increased to 2.4% from 2.2%. The sharp increase in market uncertainty means we should anticipate higher volatility in the coming weeks. We saw a similar dynamic following the invasion of Ukraine in February 2022, when the VIX index surged from around 20 to over 35 in less than a month. Traders should consider buying options to profit from these expected price swings.Strategy Implications For Eur Usd Traders
The flight to safety is making the US Dollar the primary asset of choice. This is reminiscent of the dollar’s powerful rally throughout 2022, where the DXY gained nearly 15% as geopolitical tensions and aggressive Fed policy dominated markets. We should position for this trend to continue, as safe-haven demand is currently overwhelming other factors. For the EUR/USD pair, the downward pressure is likely to persist despite the stronger Eurozone inflation figures. The war is a more immediate and powerful driver, and we only have to look back to 2022 when the pair broke below parity for the first time in two decades under similar pressures. We should consider buying put options to protect against, or profit from, a test of even lower levels. The shift in Federal Reserve expectations is also a significant tailwind for the dollar. We saw a few years ago, back in 2023, how sticky inflation data forced the Fed into an aggressive hiking cycle when the market was hoping for a pause. With the latest manufacturing price data coming in hot, the probability of a rate cut is diminishing, strengthening the dollar’s appeal. Create your live VT Markets account and start trading now.
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