The US dollar weakened even as Brent crude rose after Houthi attacks on Red Sea tankers lifted geopolitical risk and pushed US Treasury yields higher. Supply disruptions in Russia and Kazakhstan followed Ukrainian drone strikes on Black Sea infrastructure, while Kpler data showed traffic through the Strait of Hormuz down to nine vessels and transit via the Bab al-Mandeb falling from 44 to 29. Higher energy prices are feeding inflation concerns and reinforcing expectations of tighter monetary policy.
Futures markets price a 90% chance of an ECB rate rise in September, compared with 77% for the Fed, and they also imply a 60% probability of two hikes in 2026 for the ECB versus 56% for the Fed. Eurozone CPI rose from 1.9% in February to 3.2% in May, prompting the ECB to lift its deposit rate by 25 basis points to 2.25%, before easing to 2.8% in June. In Japan, USDJPY fell as a Reuters poll found 53% of 51 experts expect the overnight rate to rise from 1% to 1.25% by December, with 35% looking for an October move.
Energy Volatility and Trading Opportunities
We suggest derivative traders prepare for heightened volatility in energy-related contracts as Brent crude remains volatile around $85 to $90 a barrel due to persistent Red Sea disruptions. Recent shipping data confirms that transit volume through the Bab al-Mandeb Strait has plummeted by roughly 60% compared to normal levels, driving up freight costs and energy prices. We recommend utilizing bullish call spreads on crude oil to capitalize on these escalating supply-side pressures over the next few weeks.
Central Bank Moves and FX Strategies
With the European Central Bank’s July meeting in focus, we advise traders to closely watch the EUR/USD pair, which has rallied on hawkish expectations. While the ECB is expected to hold its deposit rate at 2.25% today, any aggressive rhetoric from Christine Lagarde regarding a September hike could push the Euro higher. To manage the risk of a sudden market reversal, we favor using long straddle options on EUR/USD to profit from high volatility.
We see a compelling opportunity in interest rate futures, where market pricing currently reflects a 90% chance of an ECB hike in September compared to a 77% chance for the Fed. Since eurozone inflation remains sticky due to geopolitical conflicts, the European regulator is highly motivated to act first. We suggest trading Eurocurrency and Secured Overnight Financing Rate (SOFR) futures to exploit these diverging central bank paths.
Finally, we advise positioning for a stronger Japanese Yen as rumors suggest the Bank of Japan may hike its overnight rate to 1.25% sooner than expected. Recent polling shows 53% of economists expect this rate hike by December, which is already forcing short-sellers to unwind their positions. We recommend buying USD/JPY put options to capture the downside as the Yen continues to recover.
