The US dollar started the week weaker, with the USD Index (DXY) sliding to two-week lows after breaking below 99.00 as risk appetite improved on optimism over a potential US-Iran deal. On the US calendar, the Conference Board’s Consumer Confidence gauge leads, with attention also on the Chicago Fed National Activity Index, the FHFA House Price Index and the S&P/Case-Shiller Home Price Index.
In G10, EUR/USD pushed up to multi-day highs around 1.1650 as broad dollar selling persisted, while GBP/USD reversed two daily declines and moved above 1.3500 ahead of BRC Shop Price Inflation and CBI Distributive Trades data. USD/JPY steadied near 159.00 after two sessions of losses, with Japan’s final Coincident and Leading Economic indices due. AUD/USD rebounded towards 0.7180, with Australian inflation figures scheduled for 27 May. In commodities, WTI fell towards three-week lows near $90.00 a barrel on scrutiny of prospects for the Strait of Hormuz reopening, while gold firmed towards $4,600 per troy ounce, supported by the softer dollar and mixed US Treasury yields.
Dollar Weakness and Market Positioning
We see the US Dollar’s weakness as the primary trend to follow in the coming weeks. With the DXY breaking the significant 99.00 support level, momentum is clearly to the downside. This suggests positioning for further declines through derivatives like put options on dollar-tracking ETFs.
The drop in WTI crude towards $90 a barrel is directly tied to a potential Iran deal, a situation reminiscent of the 2015 JCPOA negotiations which saw prices fall over 30% in the following months. Recent data showing a surprise build in US crude inventories of 1.8 million barrels only adds to this bearish pressure. We believe buying WTI put options is a prudent strategy to capitalize on this potential supply glut.
Risk-On Sentiment and Commodities Performance
The strength in currencies like the Euro, Pound, and especially the Australian Dollar reflects a classic risk-on environment. The VIX, a key measure of market fear, is currently trading near multi-year lows around 12, supporting further appetite for higher-yielding currencies. We are considering call options on the AUD/USD ahead of the May 27 inflation data, which could act as a further catalyst.
Gold’s rally towards $4,600 is a direct consequence of the dollar’s decline, reinforcing the metal’s role as a primary alternative asset. Historically, the correlation between gold and the DXY is strongly negative, often approaching -0.5 during periods of dollar weakness. This trend is further supported by recent reports of robust central bank buying, which provides a solid underlying bid for the metal.
Our primary focus remains on the geopolitical developments, as any breakdown in the US-Iran talks would likely cause a sharp and immediate reversal of these trends. The upcoming US Consumer Confidence report is the key economic data point to watch this week. A surprisingly strong reading could provide a reason for the dollar to bounce, challenging our current positions.
