Nobody knows whether the US is preparing for a ground invasion of Iran or hoping for a negotiated peace, creating economic uncertainty and money market volatility
President Trump claims that ceasefire talks are ongoing, but reports suggest the US is also preparing to send thousands of additional troops to the region. Is this a bargaining chip, or the prelude to a ground invasion of Iran? Markets are uncertain and investors are twitchy.
As the price of oil nears its biggest monthly gain on record, Donald Trump has suggested he may consider seizing Iran’s Kharg Island, which provides a sea port for the export of up to 90% of Iran’s oil products, in a further display of force.
Against this background, the dollar continued to strengthen as traders shifted investments to so-called safe haven assets. The US dollar has now strengthened by over 1.5% against the euro in the last month, and over 1.1% against the pound. European currencies are impacted by the region’s heavy reliance on oil imports from the Middle East.
Europe prepares for inflation:
Major European economies were in a fragile enough state even before the attack on Iran. They now appear highly susceptible to inflationary pressures. While UK inflation held steady at 3% in February, the data was collected before the start of the conflict. Currently, economists expect UK inflation to rise to 3.5% by the end of year, potentially triggering two interest rate hikes.
On the continent, Spain’s inflation rate surged to its highest level in nearly two years last month. Headline inflation in the eurozone as a whole drifted upwards to 2.1% in February, and economists believe it could hit 2.6% by the end of the year thanks to the Middle East conflict. Again, fresh interest rate hikes could be on the cards. Inflation and interest rate increases tend to be harbingers of exchange rate volatility.
The week ahead
Conflict in the Middle East will continue to dominate sentiment, but important economic data in the US this week includes the jobs report, consumer confidence (both Tuesday) and the balance of trade (Thursday).
In Europe, attention will turn to inflation data in major economies like Germany (Monday), France and Italy (both Tuesday) and any hints that soaring energy prices are filtering through to higher prices. In the UK, the final quarter GDP growth rate figures (Tuesday) will shed light on the state of the economy before the war in Iran began.
