The US Dollar rose for a second day on Wednesday and stayed near two-week highs around $99.00. Support came from cautious trading ahead of the Federal Reserve meeting and a stalled US-Iran peace process.
Markets are fully pricing US interest rates to stay on hold on Wednesday and most likely for the rest of the year. The committee is described as divided, with the chance of dissenting votes.
Fed Leadership Uncertainty
Jerome Powell is expected to chair what is likely to be his last Fed meeting. His term as a Governor runs until 2028, and Donald Trump has requested that he leave the bank.
Powell has said he would remain as a Governor only if he thought the Fed’s independence was at risk. The Middle East conflict remains deadlocked, with reports saying Trump disliked Iran’s latest proposal because it does not address the nuclear issue.
The Wall Street Journal reported on Tuesday that Trump told aides to prepare for an extended blockade on Iran’s ports. The Strait of Hormuz is nearing two months of closure, keeping oil prices nearly 50% above pre-war levels and weakening risk appetite.
Looking back at the end of 2025, we saw the US Dollar Index pushing towards 99.00 amidst significant geopolitical tension and uncertainty around the Federal Reserve’s leadership. That cautious mood, driven by stalled Iran talks and a hawkish Fed, has since reversed course following the appointment of the new Chair. With the Fed executing a 25 basis point rate cut last month in March 2026, the dollar index has since fallen and now trades closer to the 94.50 level.
Volatility And Options Strategies
The extreme risk aversion from that period has subsided, meaning volatility has been crushed across asset classes. Implied volatility on major currency pairs like EUR/USD has fallen from the highs we saw in late 2025, making selling options premium an attractive strategy. With the CBOE Volatility Index (VIX) now hovering around 15, down from over 25 during the crisis, traders should consider strategies that benefit from lower price swings.
The fears of stagflation, fueled by the two-month closure of the Strait of Hormuz, have almost entirely disappeared from the market narrative. We recall oil prices spiking to nearly $120 per barrel back then, but the diplomatic resolution brokered in early 2026 led to a swift reopening of the shipping lane. As of this morning, WTI crude is trading calmly around $85 per barrel, reflecting a well-supplied market.
This stabilization in energy prices suggests that the wild price swings in oil derivatives are behind us for now. The memory of last year’s 50% price surge has kept some premium in longer-dated options, which may be opportune to sell. Given that OPEC+ maintained its production quotas in its last meeting, we expect oil to remain range-bound, favoring strategies like iron condors on oil futures.
With the geopolitical risk premium gone and inflation cooling faster than expected, evidenced by Q1 2026 core CPI data coming in at 2.9%, the focus is now squarely on the Fed’s path. The market is pricing in at least one more rate cut by the end of this year, a stark contrast to the on-hold stance priced in during Powell’s final meetings. Traders should be positioned for this dovish shift by looking at interest rate futures and options that profit from a continued decline in short-term rates.
