Safe-haven demand returned early Thursday after US President Donald Trump’s remarks on the Middle East conflict did not point to a quick end to the war against Iran. US stock index futures fell 1.2% to 1.8% in the European morning, while the US Dollar rose about 0.5% above 100.00.
Trump said Iran is “no longer a threat” and that the US will hit Iran “extremely hard” over the next two to three weeks. He also said the US does not need the Hormuz Strait and that it will reopen naturally once the conflict ends.
Market Reaction And Risk Sentiment
Crude oil rose after two days of declines, with WTI near $101, up about 7% on the day. Gold fell more than 3% and traded below $4,600.
US data released on Wednesday showed private-sector employment rose by 62K versus 40K expected. ISM Manufacturing PMI edged up to 52.7 from 52.4, while the Prices Paid Index rose to 78.3 from 70.5.
Thursday’s US calendar includes February Goods Trade Balance and weekly Initial Jobless Claims. Focus shifts on Friday to Nonfarm Payrolls, the Unemployment Rate, and March wage inflation.
EUR/USD fell about 0.5% below 1.1550 and GBP/USD dropped about 0.6% below 1.3250. USD/JPY rose towards 159.50 after closing almost unchanged on Wednesday.
Volatility And Hedging Strategy
The immediate market reaction shows a clear flight to safety, so we should expect volatility to be our primary focus in the coming days. The VIX, a key gauge of market fear, has likely jumped above the 25 level, reflecting the new geopolitical risk premium being priced into equities. Buying put options on major indices like the S&P 500 is a direct way to hedge against or profit from further declines spurred by this uncertainty.
With WTI crude oil surging past $101, we must position for the risk of further price spikes related to the Strait of Hormuz. Recent statistics from the Energy Information Administration show global crude inventories are already 4% below their five-year average, meaning any real supply disruption will have an outsized price impact. We saw a similar dynamic play out in early 2022, when geopolitical events caused a rapid escalation in energy prices.
The US dollar’s strength is the dominant theme in forex, and we see gold’s sharp sell-off as a sign of a “dash for cash” rather than a loss of its safe-haven appeal. Traders are likely liquidating profitable assets to raise US dollars for safety and to meet margin calls, a dynamic we last witnessed during the market turmoil of March 2020. This suggests that for now, the dollar’s momentum will likely overpower other traditional safe havens.
As a result, we are looking at derivatives that benefit from a stronger dollar, particularly against the Euro and Pound. The break below 1.1550 in EUR/USD could open the door for a deeper slide, while GBP/USD looks similarly vulnerable below 1.3250. All eyes will be on tomorrow’s official employment report, as a strong number could add even more fuel to the dollar’s rally.
However, we must balance the geopolitical fear against the surprisingly robust US economic data released yesterday. The strong manufacturing and inflation numbers create a difficult backdrop, especially with the US headline CPI still running at 3.1% year-over-year. This underlying economic strength could cushion the stock market’s fall if tensions in the Middle East begin to ease.
