USD/CAD rose on Monday as tension in the Strait of Hormuz supported the US Dollar. The pair traded near 1.3617, up about 0.22% on the day.

Iran’s Fars news agency said two missiles hit a US naval vessel near Jask after it ignored IRGC warnings to stop. A US official denied any American vessel was struck, Axios reported.

Strait Of Hormuz Tensions Lift Dollar

The reports followed US President Donald Trump’s announcement of “Project Freedom” to escort commercial ships through the Strait of Hormuz. Tehran warned it would attack US forces if they tried to approach or enter the waterway.

Over the weekend, Washington rejected Iran’s revised 14-point proposal and sent a counteroffer now being reviewed in Tehran, with nuclear talks still unresolved. Trump told Israel’s Kan News, “It’s not acceptable to me. I’ve studied it, I’ve studied everything — it’s not acceptable.”

The US Dollar held firmer after earlier weakness, with the US Dollar Index near 98.28, extending Friday’s rebound from around two-week lows. Oil supply risks lifted crude prices, which supported the Canadian Dollar, though it still trailed the US Dollar.

Higher oil prices also raised inflation concerns and added to tighter-policy expectations for both the Fed and the BoC. Markets next focus on US and Canadian jobs reports due on Friday.

Oil Markets And Inflation Expectations

We are seeing a familiar pattern of geopolitical tensions supporting the US dollar, reminiscent of the US-Iran standoff we analyzed from the perspective of 2025. Today, renewed friction in the Red Sea shipping lanes is creating a similar safe-haven demand for the greenback. The US Dollar Index (DXY) reflects this sentiment, holding steady above the 105 mark.

This uncertainty in key shipping channels is directly impacting oil markets, providing a strong floor for crude prices. West Texas Intermediate (WTI) is currently trading above $85 a barrel, supported by recent data showing a larger-than-expected drawdown in US inventories. This situation mirrors the supply disruption fears we saw previously in the Strait of Hormuz.

For the Canadian dollar, high oil prices are supportive, yet the loonie is struggling against the overwhelming strength of the US dollar. We see the USD/CAD pair trading firmly around 1.3720, demonstrating that during heightened global risk, the USD’s status as the world’s reserve currency often dominates the CAD’s commodity correlation. This is a dynamic we have observed repeatedly in past crises.

Higher energy costs are now feeding into inflation concerns for both the Federal Reserve and the Bank of Canada. With the latest US Consumer Price Index (CPI) report showing core inflation persisting at 3.6%, traders should anticipate that the Fed will remain cautious about cutting rates. This environment suggests that buying volatility through options on USD/CAD could be a prudent strategy ahead of key data releases.

All eyes will now be on the upcoming employment reports from both nations this Friday. A strong US jobs number could cement expectations for a hawkish Fed, potentially pushing USD/CAD to test its year-to-date highs. Derivative traders should be positioned for increased price swings following the release.

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BNP Paribas economists expect UK growth to slow to 0.7% in 2026 from 1.4% in 2025. Quarterly growth is forecast to run at about 0.1%, after a projected +0.4% q/q in Q1.

Inflation is projected to rise to 3.6% year-on-year, linked to the war in Iran. It is then expected to ease gradually to 3.3% year-on-year in 2027, staying above the Bank of England’s target.

Uk Growth And Inflation Outlook

Monetary policy is projected to tighten by 50 basis points in 2026 rather than move towards easing. Ten-year gilt yields are expected to stay elevated in 2026, then fall to 4.30% in 2027.

The yen and sterling are expected to stabilise against the US dollar in 2026 and 2027. Forecasts given are USD/JPY 160 and GBP/USD 1.35 by Q4 2026.

The article notes it was produced using an AI tool and reviewed by an editor. It also describes the FXStreet Insights Team as selecting market observations from named experts and analysts.

We are seeing signs of a significant economic slowdown, with recent figures from the Office for National Statistics showing Q1 growth at a mere 0.2%. This weakness is happening alongside persistent inflation, which climbed to 3.5% in March, uncomfortably close to the 3.6% peak we anticipate. This combination suggests that derivative plays on UK assets should factor in a stagflationary environment.

Rates And Gilt Market Implications

Given these inflationary pressures, the market is no longer pricing in the rate cuts we saw being anticipated back in 2025. Instead, SONIA futures now fully reflect the expectation of at least two 25 basis point rate hikes from the Bank of England by year-end. Traders should consider positions like paying fixed on interest rate swaps to capitalize on this expected tightening cycle.

The outlook for UK government bonds suggests yields will remain high for the rest of the year. With the 10-year gilt yield currently trading around 4.6%, there appears to be limited room for a bond rally until the market starts to price in rate cuts for 2027. We believe strategies involving selling gilt futures on any strength could be effective in the coming weeks.

This combination of slowing economic activity and rising interest rates creates a challenging environment for UK equities. We’ve seen corporate profit warnings increase in the first quarter, a trend we expect to continue as higher borrowing costs impact margins. Therefore, buying put options on the FTSE 100 could serve as a valuable hedge or a speculative position against expected market weakness.

For the pound, we see a tug-of-war between a weak economy and a hawkish central bank. While the growth outlook is poor, the prospect of higher interest rates provides support, with our view targeting 1.35 for GBP/USD by the end of the year. This suggests that selling downside volatility through options strategies might be a prudent approach, as the currency may remain range-bound.

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US factory orders rose by 1.5% month on month in March. The increase was above the 0.5% forecast.

The new factory orders data for March is much stronger than anyone anticipated, coming in at 1.5%. This number suggests the manufacturing backbone of the economy is more robust than we thought. It challenges the prevailing view that economic activity was beginning to cool off heading into the second quarter.

Implications For Fed Policy

This strong report makes it very difficult for the Federal Reserve to consider cutting interest rates in the near future. With the last Consumer Price Index report showing inflation still hovering at an annualized 3.2%, this manufacturing strength gives the Fed a clear reason to maintain its “higher for longer” stance. We should operate under the assumption that a rate cut before the end of summer is now highly unlikely.

For equity options, this means we should be looking at bullish strategies on industrial and materials sectors. We remember the rally in cyclical stocks we saw in mid-2025 when similar economic data surprised everyone. In the coming weeks, call spreads on industrial ETFs look attractive, as these companies benefit directly from sustained demand.

On the interest rate side, the path is becoming clearer. This data reinforces the bearish case for bonds, as higher-for-longer rates mean lower bond prices. We should consider buying put options on long-duration Treasury ETFs or establishing short positions in Treasury futures to hedge against or profit from rising yields.

This news is also a clear positive for the U.S. dollar. The prospect of sustained higher interest rates relative to Europe and Japan will likely drive capital inflows. Therefore, derivative plays that benefit from a stronger Dollar Index, such as long positions in USD/JPY futures, should be on our radar.

Positioning For A Stronger Dollar

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Silver began the week lower, trading near $73.50 and down 2.41% on Monday. The move came as the US Dollar strengthened and US Treasury yields rose, prompting profit-taking.

Tensions around the Strait of Hormuz added uncertainty after Iranian state-linked media reported missiles fired towards a US naval vessel. US officials said no ship was hit, while the US launched a naval initiative to protect commercial routes and Iran warned of retaliation; talks showed no progress.

Drivers Of The Current Move

Despite the risk-off mood, demand was directed mainly towards the US Dollar rather than precious metals. Higher yields also reduced interest in Silver because it does not pay interest.

Markets continued to factor in a longer period of tight US monetary policy due to inflation risks, including energy-price effects tied to possible supply disruption. The CME FedWatch tool showed expectations for easing being pushed back, with greater pricing for tighter policy over time.

Attention now turns to upcoming US data, including labour-market and activity releases, and speeches from Federal Reserve officials. These are expected to shape expectations for the future path of interest rates.

As silver trades around $28.50 on May 4, 2026, we are seeing a familiar pattern. We recall how a strong US Dollar and rising yields pressured the metal back in 2025. This historical context is crucial for our strategy now.

The US Dollar Index is currently firm above 105.5, and 10-year Treasury yields are holding near 4.6%, creating headwinds for non-yielding assets like silver. The Federal Reserve’s recent minutes reaffirmed their data-dependent, hawkish stance, pushing back expectations for any rate cuts until at least the fourth quarter. This mirrors the investor sentiment we saw last year.

Strategy Implications Now

Unlike the Mideast tensions of 2025, today’s market anxiety stems from trade disputes in the Pacific, which is similarly fueling a flight to the safety of the dollar. This reinforces the lesson that in the current market, geopolitical risk does not automatically mean higher precious metal prices. The dollar remains the preferred safe haven for now.

Given this environment, we should consider buying put options to protect our long-term silver holdings against further downside. A drop below the key $28.00 support level seems increasingly likely if the dollar continues its ascent. This strategy provides a hedge without forcing us to liquidate our core physical positions.

For those looking to speculate on further weakness, selling call spreads with strike prices well above $30.00 could be an effective strategy to collect premium. Implied volatility has remained subdued, currently around 22% for 3-month options, making option-selling strategies more attractive. This approach profits from both price stagnation and a potential decline.

We are also closely watching the gold-silver ratio, which has climbed to 90:1, a high not seen since early 2025. This suggests silver is relatively cheap compared to gold, presenting a potential long-term opportunity. A pairs trade, going long silver futures while shorting gold futures, could be a way to play a potential reversion of this ratio in the coming months.

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TD Securities economists project US nonfarm payrolls of 80k, with 85k private-sector gains and 5k government job losses. They forecast the unemployment rate at 4.3%, with participation broadly unchanged, and average hourly earnings rising 0.2% month on month, lifting annual wage growth to 3.7%.

They expect the ISM Services PMI to edge down to 53.7 as February’s rise continues to unwind. They also see JOLTS job openings moving lower and University of Michigan sentiment softening only slightly.

Macro Backdrop And Recent Data

The macro backdrop includes the Iran conflict and higher energy prices. Recent data cited include a Q1 GDP rebound linked to the end of a government shutdown and firmer underlying activity.

Consumption is described as moderating, while fixed investment is said to be rising, partly supported by AI-related spending. These conditions are described as consistent with the Federal Reserve maintaining a patient stance.

Looking back at forecasts from 2025, we saw expectations for a major labor market normalization, with payrolls predicted to fall as low as 80,000. However, the most recent jobs report for April 2026 showed a much healthier addition of 195,000 jobs, confirming the slowdown never fully took hold. This persistent gap between year-old expectations and current reality suggests continued market volatility, which traders can capitalize on.

This environment of economic surprise makes options strategies particularly attractive. We believe traders should consider buying straddles on major indices ahead of upcoming inflation and employment data releases. This allows for profiting from a significant market move in either direction, which is likely given how consistently the data has defied earlier, more pessimistic forecasts.

The old view was that a resilient economy gave the Federal Reserve room to be patient, but that patience is likely running out. With the unemployment rate today holding firm at 3.8%, far below the 4.3% feared in 2025, the pressure to maintain a restrictive policy is growing. Therefore, derivative traders should be positioned for hawkish surprises, possibly using futures to bet on interest rates remaining higher for longer than the market currently prices in.

Inflation Rates And Energy Hedging

Wage growth was expected to cool to 3.7% year-over-year, but the latest 2026 figures show it remaining stubbornly above 4.1%, fueling inflation. This stickiness suggests that derivatives tied to the Consumer Price Index (CPI), such as inflation swaps, will likely see increased activity. We see an opportunity in positioning for inflation to remain elevated through the second half of the year.

Concerns from 2025 over geopolitical conflict and energy prices remain highly relevant today. Historically, events like the oil shocks of the 1970s demonstrate how quickly energy markets can react to global instability. Consequently, we recommend using call options on oil futures or related ETFs to hedge against, or speculate on, sudden price spikes driven by ongoing tensions.

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Commerzbank’s Michael Pfister forecasts EUR/CHF will rise in the next few months if the euro recovers and markets delay expected Swiss National Bank (SNB) rate rises. He says the SNB has used repeated verbal messages to slow the franc’s recent rise.

Market pricing for SNB tightening has shifted since the outbreak of the Iran war, with about one rate rise priced in by year end. Pfister considers a rate rise this year unlikely.

Near Term Eur Chf Upside

He expects the European Central Bank to raise rates in June while the SNB keeps rates unchanged. This would widen the interest rate gap with the euro and, in this scenario, reduce the franc’s appeal.

He describes an SNB approach of verbal statements, only small actual interventions, and steady rates. He says this could lift EUR/CHF by a further two centimes once the euro’s recent weakness is fully reflected in prices.

Later, he expects the franc to strengthen again as Switzerland’s lower inflation and healthier public finances come back into focus. On that basis, EUR/CHF is projected to drift lower again into 2027.

The Swiss National Bank’s strategy appears to be a mix of talking down the franc while keeping interest rates unchanged, a pattern we also observed in early 2025. With Switzerland’s latest inflation figure for April coming in at a low 1.4%, there is little pressure for a rate hike. This contrasts with the Eurozone, where inflation remains stickier around 2.5%, keeping the European Central Bank on hold and widening the interest rate differential in the Euro’s favor.

Trade Expression And Timing

This divergence suggests a window for a potential rise in EUR/CHF over the next several months. Traders could consider buying EUR/CHF call options with strike prices near the 1.0000 parity level, targeting expirations in late summer such as August or September 2026. This approach positions for the expected move higher while clearly defining the maximum risk involved.

We remember how market expectations for SNB rate hikes rose sharply during the flare-up of the Iran conflict in 2025, but those hikes never actually happened. The market is again pricing in a small probability of a rate increase by the end of this year, which we view as unlikely. The SNB seems to be following the same playbook of using words, not policy changes, to manage the currency.

However, this is likely a temporary opportunity, as the franc’s underlying strength is expected to re-emerge later in the year. Switzerland’s solid public finances, with a public debt-to-GDP ratio historically well below 40%, and a track record of lower inflation will eventually attract capital back to the franc. Any long positions should therefore be managed with a view to exit before the final quarter of 2026, when this long-term trend could resume.

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US Treasury Secretary Scott Bessent said on Fox News on Monday that the US is opening up the Strait of Hormuz and has “absolute control” of it, according to Reuters. He said Iran does not control the strait.

Bessent said the US is firing only when fired upon. He also said now would be a good time for international partners to increase pressure on Iran.

Officials Claim Control Of The Strait

He said he thinks the market will be very well supplied. He said he is aware that gas prices are affecting Americans, but expects prices to come down quickly when the conflict ends.

The US Dollar Index showed no immediate reaction to the comments. It was last up 0.12% on the day at 98.32.

We are being told the Strait of Hormuz is under control and that the market will remain well supplied. However, this official reassurance clashes with the current high-risk environment for oil transit. Derivative traders should view this as an attempt to manage market sentiment rather than a reflection of a risk-free situation.

The CBOE Crude Oil Volatility Index (OVX) has surged to near 55 in recent weeks, a level we haven’t seen since the supply chain shocks of 2025. This indicates the options market is pricing in significant price swings, directly contradicting the calm projected by officials. We should therefore consider strategies that profit from this high volatility, such as purchasing straddles on Brent crude futures.

Options Markets Signal Elevated Risk

While officials state they are only firing when fired upon, any miscalculation could halt the nearly 18 million barrels of oil that pass through the strait daily. We remember how drone attacks in mid-2019 caused Brent futures to spike over 14% in one trading session. Given this history, buying out-of-the-money call options on crude oil for the coming months offers a limited-risk way to position for a potential escalation.

The statement that gas prices will come down “when the conflict ends” is a key tell, as it offers no concrete timeline. This uncertainty is a direct opportunity for energy sector trades. We can use options on energy ETFs like the XLE to hedge or speculate on continued strength in oil producers, who benefit from the elevated risk premium.

The US Dollar’s muted reaction suggests the currency market is already treating the dollar as a safe haven amid the conflict. Sustained tension will likely continue this trend, supporting a long USD position against the currencies of major oil-importing nations. We see this as a lower-volatility way to maintain exposure to the ongoing geopolitical risk.

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RBNZ policy member Prasanna Gai said the Strait of Hormuz supply shock does not justify automatic interest rate rises. He supported a standard “look-through” approach to supply shocks.

Gai said pre-emptive tightening is only warranted when economic synchronisation is high and coordination mechanisms are active. He said these conditions are not currently met.

Neutral Rate Implications

He also said the shock has raised the neutral interest rate, which implies a higher baseline for future policy normalisation. The comments were set against New Zealand’s fragile economy and prior aggressive rate cuts throughout 2025.

The article states it was created with the help of an Artificial Intelligence tool and reviewed by an editor.

Recent comments from the RBNZ suggest they will look through the Strait of Hormuz inflation shock. This indicates a lower probability of near-term rate hikes, making it attractive to receive fixed rates on short-term New Zealand interest rate swaps. We see the Official Cash Rate (OCR) likely remaining on hold through at least the third quarter of 2026.

This dovish stance is understandable given New Zealand’s fragile economic backdrop, with Q1 2026 GDP growth coming in at a mere 0.2%. While headline inflation for that same quarter remained sticky at 4.0%, policymakers are clearly signaling their focus is on the weak growth outlook. They appear willing to tolerate this temporary price pressure to avoid damaging the economy further.

Trading Implications For Kiwi

The policy divergence with more hawkish central banks, like the US Federal Reserve which is holding rates firm, will likely weigh on the New Zealand dollar. We anticipate further pressure on the NZD/USD exchange rate, which has already fallen over 3% since March. Strategies like buying puts or establishing bearish put spreads on the Kiwi could be profitable in the coming weeks.

From our current perspective in May 2026, we must remember the RBNZ’s aggressive easing cycle just last year. The central bank delivered 125 basis points of cuts throughout 2025 to combat a significant slowdown, so a rapid reversal now seems inconsistent with their recent actions. This history reinforces their current cautious and dovish messaging.

However, the acknowledgement of a higher neutral interest rate is a key long-term signal that should not be ignored. This suggests that while the front end of the yield curve may stay anchored, longer-dated bond yields could rise, leading to a steeper curve. Traders should therefore be cautious with outright dovish bets on the 5-year and 10-year parts of the curve.

This tension between a dovish central bank and external inflationary pressures is likely to increase market volatility. The NZD 3-month implied volatility has already ticked up to 9.5%, reflecting this uncertainty. Buying volatility through options, such as straddles on the Kiwi dollar ahead of the next RBNZ meeting, could be a prudent way to trade this environment.

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BNP Paribas forecasts US GDP growth of 2.4% in 2026, up from 2.1% in 2025. It puts 2026 inflation at 3.3%, and expects inflation to remain above target through 2028 due to higher oil prices and tariffs.

The Fed Funds target range is projected to stay at 3.5%–3.75%. The forecast includes a Federal Open Market Committee shift to a “two-sided outlook”, indicating readiness to raise or cut rates if needed.

Dollar Weakens Against Euro

BNP Paribas expects the US dollar to weaken gradually against the euro under its base-case scenario. It describes this scenario as a gradual normalisation in the Middle East and ongoing price pressures.

The bank forecasts EUR/USD at 1.21 by Q4 2026 and 1.25 by Q4 2027. The article states it was produced with the help of an AI tool and reviewed by an editor.

We see the US economy running hotter than its potential this year, with growth on track for 2.4%. The most recent data from Q1 2026 confirmed this strength, showing an annualized growth rate of 2.6%. This momentum suggests the economy is comfortably absorbing the current level of interest rates.

Inflation is proving stubborn and is expected to average 3.3% this year, a trend we also observed through much of 2025 when it consistently stayed above target. This persistence makes it unlikely the Federal Reserve will consider rate cuts in the near term. We therefore expect the Fed Funds target range to remain steady at 3.5%-3.75% for the remainder of the year.

Trading Implications For Eurusd

This economic picture points to a gradual weakening of the US dollar against the euro. With the American economy’s outperformance becoming less pronounced and diversification flows continuing, the dollar’s appeal should slowly fade. We are targeting a EUR/USD rate of 1.21 by the end of this year.

For traders, this outlook suggests positioning for a slow and steady rise in the EUR/USD pair, which currently sits near 1.1850. Buying long-dated call options on the euro could be an effective way to gain exposure to this anticipated upward drift. The relatively low market volatility means these options are not excessively priced right now.

Given the expectation for a steady Fed, options that profit from a lack of interest rate movement, such as selling strangles on SOFR futures, could also be considered. The main takeaway for the coming weeks is to prepare for a patient, grinding move higher in the euro, not a sharp breakout.

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Brazil’s S&P Global Manufacturing PMI increased to 52.6 in April, up from 49 previously.

A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

Implications For Economic Momentum

We see the jump in Brazil’s manufacturing PMI to 52.6 as a clear signal of renewed economic expansion. This move from contractionary territory suggests factory output and new orders are picking up steam. This should lead us to re-evaluate Brazilian assets for potential upside in the coming weeks.

This data points towards taking on bullish positions in Brazilian equities. The Ibovespa index, which has been trading in a tight range around 128,000 points, could see a breakout on the back of this improved economic outlook. We should consider buying call options on the index or on major industrial and materials companies that directly benefit from this activity.

The strengthening manufacturing sector should also provide a tailwind for the Brazilian Real. After seeing the USD/BRL pair hover stubbornly above 5.00 for most of the first quarter, this data could provide the catalyst for a move towards 4.90. We should look at positions that benefit from a stronger Real, such as selling USD/BRL futures.

We remember the volatility we faced through much of 2025, when uncertainty around interest rates and global demand weighed heavily on the market. That period saw the PMI dip below 50 for several consecutive months, a trend that is now decisively broken. This new reading is the strongest we have seen in over eighteen months, suggesting a more durable recovery.

However, this stronger economic picture could complicate the central bank’s path. While expectations were for continued cuts to the Selic rate, this robust activity may cause policymakers to pause to ensure inflation remains contained. We must monitor upcoming inflation prints closely, as a hawkish turn from the central bank could temper the market’s enthusiasm.

Key Risks And Policy Watch Items

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