Markets began Monday in a guarded mood as attention stayed on Middle East developments, while Canada’s May Consumer Price Index (CPI) later in the day and speeches from major central bank officials set the near-term diary. Iran reportedly reached a draft understanding on how the United States would issue a waiver lifting sanctions on Iranian oil exports, a step tied to possible talks on its nuclear file. Mediated discussions were said to have produced a roadmap for a final deal within 60 days, while separate reports said Iranian negotiators suspended talks in Switzerland following verbal threats from President Donald Trump.
In markets, the US Dollar (USD) Index rose nearly 1% last week and traded around 100.90, as US stock index futures were mixed. EUR/USD held above 1.1450 after last week’s decline, and the People’s Bank of China (PBOC) kept Loan Prime Rates (LPRs) unchanged at 3.00% for one year and 3.50% for five years, as AUD/USD hovered near 0.7000. GBP/USD stayed above 1.3200, while USD/JPY traded near 161.70. Gold (XAU/USD) rebounded to around $4,200, up about 1% on the day after a third straight daily fall on Friday.
Volatility And Strategy Amid Geopolitical Tension
We are bracing for significant volatility, especially in energy markets, due to the conflicting messages regarding Iran. The possibility of a deal lifting sanctions within 60 days contrasts sharply with threats of new military action, creating a binary outcome for oil prices. Implied volatility on WTI and Brent crude options has already risen over 15% in the last week, reflecting this deep uncertainty.
Given this, we are positioning for a large price swing in oil rather than betting on a specific direction. We are buying both call and put options, specifically looking at straddles on front-month crude oil futures. Historical data from similar geopolitical standoffs in 2019 and 2022 shows that such strategies profited as the market eventually broke sharply one way or the other once clarity emerged.
Currency Markets And Safe-Haven Flows
We are also focused on the extreme tension in USD/JPY, which is trading near 161.70. Japanese officials are issuing their strongest warnings of intervention since the last market action in 2024, and the cost of hedging against a sudden yen appreciation has surged. We are purchasing cheap, out-of-the-money puts on USD/JPY as a low-cost way to profit from a potential sharp, multi-yen drop if the Ministry of Finance acts.
Political instability in the UK is another area of focus, with the Prime Minister’s future in question. The implied volatility for the British Pound has ticked up, and we anticipate choppy price action in GBP/USD around the 1.3200 level. For now, we are avoiding taking large directional bets and are instead monitoring options pricing for an opportunity to trade a potential spike in volatility.
The market’s nervousness is clear from the flight to safety into both the US Dollar and Gold. The Dollar Index is holding firm above 100.00, while Gold is recovering toward $4,200, which confirms a classic risk-off sentiment. We are using call options on gold and long positions in US Dollar futures to hedge our broader portfolio against a potential escalation in geopolitical conflicts.
