The Swiss franc strengthened against the US dollar on Monday, with USD/CHF sliding to 11-day lows below 0.7820 after trading above 0.7900 last week. The move came as a tentative risk-on tone developed on hopes of a US-Iran peace deal and a potential reopening of the Strait of Hormuz, while most Western markets were shut for bank holidays, reducing liquidity and weighing on the dollar’s safe-haven bid. Separately, US President Donald Trump said Washington and Tehran were drawing closer to an agreement, though he also warned the US would keep its blockade on the strait and added he was not in a rush to reach a deal.
Iran’s Foreign Ministry said Tehran is negotiating an end to the war but “is not currently discussing” nuclear issues, a key point of friction, while adding that management of the Strait of Hormuz “belongs to the coastal countries”. With US markets closed for Memorial Day, attention turns to April’s preliminary US PCE Price Index. Recent firmer inflation signals and stabilising labour market data have shifted rate expectations, with markets pricing a more than 50% chance of a Fed rate hike in 2026 versus one or two additional cuts expected before the US attack on Iran on 28 February, a mix that may cap the dollar’s recovery.
Volatility and Trading Strategy Amid US-Iran Developments
The current weakness in the US Dollar, pushing USD/CHF below 0.7820, is directly tied to headlines surrounding a potential US-Iran peace deal. This sentiment is highly fragile, as any setback in negotiations could quickly reverse the dollar’s recent losses. We are seeing this uncertainty reflected in the derivatives market, where one-month implied volatility for USD/CHF has climbed to 8.5%, indicating traders are preparing for a significant move.
Given these conflicting signals, we believe this is an environment to trade volatility rather than a specific direction. The immediate downward pressure on the dollar from peace hopes could be completely undone by strong US economic data later this week. Therefore, we are considering strategies like long strangles on the dollar, positioning to profit from a sharp price swing in either direction before options expire.
Outlook Hinges on Monetary Policy and Inflation Data
We must not forget the fundamental shift in monetary policy expectations, which is a powerful undercurrent supporting the dollar. The market is now pricing in more than a 50% probability of a Federal Reserve rate hike this year, a dramatic reversal from the rate cuts anticipated before February. Looking back at the last US Consumer Price Index report, core inflation came in at a stubborn 3.9%, which gives credibility to the Fed maintaining a hawkish stance.
The preliminary US Personal Consumption Expenditures (PCE) Price Index for April, due this week, will be the key catalyst. A hotter-than-expected inflation number would almost certainly solidify bets for a Fed rate hike and cause a sharp reversal higher in the US Dollar. Conversely, a soft reading could extend the current dollar weakness, making the outcome of this data release absolutely critical for our positioning in the coming weeks.
