EUR/USD fell as risk aversion rose after US–Iran talks ended without an agreement following 21 hours. The pair traded near 1.1670 in Asian hours after a gap down at Monday’s open.
US Vice President JD Vance said the talks in Islamabad did not produce a mutually acceptable deal. He added the US wants firm assurances that Iran will not pursue nuclear weapons.
US President Donald Trump said the US would start blockading ships entering or leaving the Strait of Hormuz. CENTCOM said forces will begin blockading all maritime traffic entering and exiting Iranian ports at 10 AM ET (14:00 GMT) on Monday.
Iran’s Parliament Speaker Mohammad Bagher Ghalibaf said the US did not gain the Iranian delegation’s trust, and said the decision now rests with Washington. Iran’s Revolutionary Guard warned that military vessels nearing the Strait of Hormuz would breach the ceasefire and face a decisive response.
Given the breakdown in talks and the impending US blockade, we see a classic flight to safety into the US Dollar. The drop in EUR/USD to 1.1670 reflects this, and we expect this trend to continue as Europe’s greater dependence on energy imports makes the Euro vulnerable. Options traders should consider buying EUR/USD puts or selling out-of-the-money calls to capitalize on further downside.
The most direct impact will be on crude oil prices, and we should immediately take a bullish stance. The Strait of Hormuz is a critical chokepoint, with historical data showing it handles over 20% of global petroleum liquids consumption. A blockade, even a partial one, will cause a significant supply shock, making long positions in WTI and Brent crude futures or call options the primary trade.
We saw a similar, albeit different, situation in the early months of 2022 when geopolitical conflict caused WTI crude prices to surge from around $90 to over $130 per barrel in just a few weeks. Based on that precedent, we anticipate that oil could test its 2025 highs very quickly. This move makes energy sector equities one of the few defensive havens in the stock market.
This increased risk aversion will likely pressure global equities, creating opportunities on the short side. The combination of geopolitical uncertainty and soaring energy prices acts as a tax on the global economy, hurting corporate profit forecasts. We are looking to buy put options on broad market indices like the S&P 500 and the Euro Stoxx 50.
Finally, a sharp rise in market volatility is almost certain in the coming days. The CBOE Volatility Index (VIX) will be a key instrument to watch, and we should be buying VIX call options to hedge our portfolios and profit from rising fear. We only need to look back to the market shocks of early 2022, when the VIX jumped by over 50% in a matter of days.
