Dollar's 0.2% Gap Lower on Iran Deal Hopes; Fed Bets Unwind

The US dollar opened the trading week down 0.2% after reports of progress in US-Iran negotiations. President Donald Trump stated that the terms of a deal to resolve the conflict peacefully have largely been agreed upon. He then noted that he is in no rush and both sides must get everything right. If the Strait of Hormuz reopens soon, the shift would radically alter the forex landscape.

Dollar's 0.2% Gap Lower on Iran Progress Signal

The dollar’s small downward gap at the Monday open reflects a market re-pricing of geopolitical risk. A peaceful resolution would remove a key source of energy supply disruption, lowering crude prices and easing inflationary pressures.

Trump: Terms Agreed, No Rush

Trump’s comments carried two distinct signals. First, the framework for a deal exists. Second, the administration will not force a quick close. That nuance leaves the door open for further volatility if negotiations stall or collapse. Mediators have indicated a memorandum of understanding would extend the ceasefire for at least 60 days.

Iran's $100B Asset Demand and Oil Sanctions

According to mediators, Iran has demanded the unfreezing of $100 billion of its assets and the lifting of sanctions on oil sales. These are high-stakes concessions that US negotiators may resist. Any breakdown in talks would reverse the geopolitical relief trade, sending the dollar higher again.

Fed Rate Path Tilted by Potential Oil Price Drop

The US dollar has been strengthening as the likelihood of the Federal Reserve tightening monetary policy increased. As early as the beginning of May, the futures market expected a rate hike in April of next year. Then expectations shifted to March, then to the end of 2026. At one point, the odds of a monetary tightening cycle starting in December exceeded 60%.

The Oil-to-Inflation Transmission

If oil prices fall, inflation will follow. That would return the Fed to the narrative from the start of the year, when a rate cut could follow a rate hold. This is the scenario the White House is banking on. At Kevin Warsh’s swearing-in ceremony, Trump emphasised that the Fed must remain independent. He devoted considerable attention to the transitory nature of inflation. Cutting rates during a strong economy could trigger a real boom in GDP growth, a goal the administration appears willing to pursue.

Speculative Net Long USD at 3-Week High

Speculative net long positions in the dollar rose to their highest level in three weeks as the Fed hike narrative gained traction. That positioning is now at risk. A reversal would add momentum to the dollar’s decline, amplifying moves in EURUSD, GBPUSD, and other dollar pairs.

EURUSD Jumps on De-escalation Hopes; Past Failures Caution

The euro jumped higher on hopes of a peaceful resolution to the conflict in the Middle East. EURUSD rose on the session, capitalising on the dollar’s weakness. Reports of progress have stalled in the past when it came to agreeing on deal terms. The risk of a failed negotiation means the move is not yet a trend.

Eurozone Energy Drag and ECB Expectations

The eurozone economy has shown signs of a significant slowdown due to rising energy prices. As a result, the futures market has scaled back its expectations regarding the extent of the European Central Bank's monetary tightening. A de-escalation in the Middle East would lower energy costs, providing a tailwind for the eurozone recovery. That dynamic could reverse the ECB’s dovish drift.

A deal removes the energy cost drag on eurozone growth.

Lower inflation gives the ECB room to hold off on further tightening.

EURUSD would benefit from both the dollar sell-off and the eurozone growth upside.

What Confirms the EURUSD Setup

A sustained drop in crude oil prices below recent support levels would confirm the inflation-easing thesis. If the Strait of Hormuz remains open and Iran sanctions are lifted, oil supply growth would accelerate. That would push the Fed back toward a hold-and-cut stance and reinforce EURUSD strength.

What Weakens the Thesis

If the Iran talks break down without an agreement, oil prices would snap higher. The dollar would regain its safe-haven bid, and Fed rate hike odds would climb again. The White House’s patience – Trump’s “no rush” stance – leaves room for failure.

Dollar Positioning Risks Reversal with Net Longs at 3-Week High

The crowding in long dollar positions sets up a potential reversal if the catalyst shifts. A drop in oil would unwind the inflation premium built into Fed rate expectations. The forex correlation matrix shows the dollar is tightly linked to oil direction in this environment.

Next Catalyst: Formal MOU Signing

The next catalyst is the formal signing of the memorandum and the subsequent lifting of sanctions. Mediators expect a ceasefire extension of at least 60 days. Until the details are public, the dollar will trade on headlines, making a range-bound approach more practical than chasing a directional breakout.