Renewed Middle East hostilities lifted oil for the first time in four sessions and reversed a three-day fall in European and US bond yields, while the US dollar was narrowly mixed versus the G10. Australia’s softer June CPI pushed the futures market to further pare 2026 hike expectations after three rises in H1 26; the Australian dollar was at more than two-week lows and down almost 0.5%, the weakest in the G10. In EM, the South Korean won and Taiwanese dollar outperformed, and the PBOC set the dollar fixing at CNY6.7899 versus CNY6.7928, a marginal new three-year low. Ahead of an unusually uncertain FOMC decision, Fed funds futures implied almost 44 bp of tightening by year-end, with about nine points priced for today (around a 1-in-3 chance), a fully discounted September move and slightly more than a 70% probability of another rise by year-end.
In FX, the euro rebounded from just below $1.1355 to near $1.1410, with €1.1 bln of options at $1.1415 expiring today and nearly €2 bln at $1.1375 tomorrow; dollar/yen traded around JPY163.70 after probing near JPY163.30, with $1.45 bln of options at JPY163.50 expiring tomorrow. Sterling held around $1.3280–$1.3310 after dipping to $1.3275, while dollar/Canada eased from near CAD1.4130 to about CAD1.4085 as roughly $500 mln at CAD1.4100 expires today; the Aussie slipped below $0.6940 after a two-week low near $0.6965. Elsewhere, the dollar traded MXN17.4175–17.4930 yesterday and about MXN17.4275–17.4600 today as Q1 GDP contracted 0.6% q/q, while CNH held within a two-week 6.7630–6.7820 band; the rupee strengthened as the dollar briefly broke INR95.49 from INR96.57 late last week. Asia equities steadied but South Korea’s Kospi fell 6% and Taiwan’s Taiex 3.75%, while Stoxx 600 was down almost 0.2%; over three sessions, 10-year Treasury and Bund yields fell 10 bp and gilts 16 bp, before a 2–4 bp rebound in Europe and the US 10-year at 4.62%. Gold made a five-day low just below $4012 and held above $4010 with resistance near $4050; silver fell to about $56.65 then ran to nearly $58.25, and September WTI jumped from just through $77.80 to $83.30, trading around $82. UK June mortgage lending improved slightly and net consumer credit rose nearly steadily, with swaps pricing almost no chance of a BoE move tomorrow, about 55% odds of a September hike and a fully priced rise in early November; in Australia, a 0.1% June CPI fall pulled inflation to 3.8% y/y from 4.0%, Q2 CPI rose 0.6% after 1.4% in Q1 26, and trimmed mean was 0.8% q/q with 3.6% y/y versus 3.5%, while implied tightening fell from 30 bp at end-last week to slightly under 13 bp.
Energy, Rates, and Currency Market Outlook
We should brace for continued volatility in the energy sector by utilizing call options on September WTI, which has quickly rebounded to $83.30 due to renewed Middle East hostilities. Historically, geopolitical risk premiums can rapidly inject an extra $5 to $10 per barrel into crude prices, mirroring the sudden spikes seen during previous regional escalations. By securing upside exposure through call options, we can capitalize on sudden supply-side shocks while strictly limiting our downside risk.
With the 10-year Treasury yield stabilizing at 4.62% and the market pricing in a 1-in-3 chance of an immediate Fed rate hike, we see an overestimation of hawkishness under Chair Warsh. Given the softer June CPI and moderating job growth, the Fed is highly likely to pause today, which historically triggers a relief rally in bonds and pushes yields lower. We recommend buying call options on Treasury futures to position for a drop in yields back toward the 4.40% level.
In the currency markets, we should target the Australian dollar and the Japanese yen for strategic derivative plays in the coming weeks. The RBA’s falling hike probabilities make the AUD a prime candidate for put options, especially as it struggles to hold the $0.6960 level. Meanwhile, if USD/JPY breaks below the key support of JPY163.30, we should buy put options to capture a rapid technical drop toward JPY162.60.
Metals and Safe Haven Strategy
Despite gold holding steady above $4010 and silver consolidating near $57.50, we expect these metals to break out as geopolitical tensions linger and the dollar faces mixed G10 pressure. Historically, precious metals act as the ultimate safe haven during periods of monetary uncertainty and high tariffs, often yielding double-digit returns during prolonged conflicts. We should accumulate long call spreads on gold to leverage a potential breakout past the heavy resistance at $4050.
