The sharp military escalation over the weekend between the US/Israel and Iran, alongside the widening of the conflict across the Gulf region, has triggered a classic risk-off environment in financial markets.
Stock markets and risk currencies (e.g. GBP) have come under pressure, while traditional safe-haven assets (e.g. USD and Gold) have strengthened as investors seek safety. Furthermore, oil prices have surged (circa 8% as I write) as investors become concerned that supply routes will be disrupted (roughly one-fifth of global oil and LNG travels through the Strait of Hormuz). This spike in oil might have been higher had global inventories not risen so much over the past year following a year of oversupply and therefore the immediate impact hasn’t been so dramatic. However, if the conflict drags on, and supplies continue to be disrupted, then analysts believe there’s scope for energy prices to rise further which could reignite global inflation and send the global economy into a tailspin once again.
As a result, the GBP/USD has continued its fall from the back end of last week (where FX markets had started to price this war in) and dipped around 1% earlier to a 10-week low. The GBP/EUR is steady this morning but still trading close to the lower end of where it’s been in the past 10-weeks. The EUR/USD has fallen around 1-cent this morning and currently trades around a 5-week low.
Looking ahead, there are some important data releases this week including EU inflation (Tues) and EU GDP, US retail sales, and US non-farm payroll data (all out on Fri). However, all eyes will remain focused on the situation in the Middle East and these geopolitical developments likely continue to dominate the sentiment in the near term.
