Markets remain in a cautious mood as the Iran conflict enters another week with no clear resolution in sight and as rhetoric from President Trump ramps up.
Over the weekend, Trump threatened to take Iran “back to the stone ages” with attacks on key civilian infrastructure (such as bridges and power stations) if a deal to reopen the Strait of Hormuz isn't reached before tonight's 1am deadline. This morning, he doubled down on these threats stating that “a whole civilisation will die tonight, never to be brought back again” if a deal isn't made. There is still hope that things will de-escalate but the next 24hrs look to be pivotal.
So far, financial markets have taken the latest threats largely in their stride having become rather numb to Trump’s pattern of alternating between threats and deadline extensions. Oil prices remain elevated and equity markets are generally down today, but both remain poised to react depending on events on the ground.
In other news, Friday’s US non-farm payroll and unemployment data came in better than expectations. So far, there are few signs that the Iran war and the spike in oil prices are having a meaningful impact on the US economy. However, tomorrow's US inflation report (CPI) will be the first to fully capture the war's impact on energy prices and should provide a much clearer picture.
Either way, a divergence between the US and Europe is becoming more apparent. Early Eurozone inflation and sentiment data points to a significant stagflationary impact from the war (i.e. high inflation and slow growth). Headline inflation spiked to 2.5% in March from 1.9% the month before and the markets are pricing in nearly three hikes from the ECB this year. In the UK, markets are currently pricing in two BoE rate hikes before the end of 2026 and, with the UK economy and labour market already in a fragile state, the BoE will be wary of hiking interest rates too aggressively to avoid tipping the economy into a recession.
As a result, the GBP/USD remains subdued but around 1cent above last week’s low. The GBP/EUR trades in a relatively tight range but towards the lower end of where it’s been over the past 5-weeks. As before, Iran war developments will remain the dominant market driver and any credible signs of de-escalation could trigger a sharp drop in oil prices, a move away from safe haven currencies (e.g. USD) and vice-versa if things escalate instead.
