Market Recap:
Exchange rate fluctuations can be expected this week as investors react to US military involvement in the oil-rich region, favouring safe haven assets.
US involvement in the Israel-Iran threatens to ignite a wider regional war:
One retaliatory measure open to Iran is threatening shipping in the strait of Hormuz, through which a fifth of the world’s oil supply travels each day.
Oil prices rose again on Monday morning again on the possibility alone (crude prices surged by 4% in early trading, before slipping back slightly).
A closure of the strait would see inflation quickly spike. Money markets could fluctuate significantly over the coming days and weeks as investors seek safe havens.
Euro gains, pound slips amid market uncertainty and safe-haven dollar demand:
For now, the euro continued to strengthen against the dollar last week, up 1.6% on the greenback in the last month. The euro is supported by eurozone inflation figures which recently hit a three-year low.
However, the dollar did gain ground against the pound, boosted by its safe haven status, though the pound remains over 6.4% up since this time last year. The pound also slipped against the euro, confirming sterling’s status as a riskier currency in times of crisis.
Interest rates:
Both the Bank of England and the US Fed opted to keep interest rates unchanged last week, at 4.25% and 4.5% respectively. This was expected, though conflict in the Middle East has thrown the future direction of rates into some confusion.
The easing cycle may be paused or even reversed if oil price hikes, combined with President Trump’s unpredictable tariff policies, lead to significant and enduring inflationary pressures. On the other hand, central banks may feel the need to support faltering economies. It’s an unpredictable picture at present.
Coming Up:
Money markets will be paying particular attention to the Fed chairman Jerome Powell’s appearance before Congress this week (Tuesday), with investors looking for clues about the central bank’s thinking for the rest of the year. Exchange rates could also be impacted by a range of economic indicators, including a series of flash Purchasing Managers’ Index (PMI) results for major eurozone economies and the UK (Monday). PMIs are snapshots of the health of economies based on surveys of purchasing managers, often focusing on new orders.
Inevitably, however, all eyes will be fixed on the situation in the Middle East, with hopes centred on an easing of tensions.
