Middle East on the Brink: Markets Eye US Involvement
Tensions in the Middle East have once again taken centre stage, with the Israel–Iran conflict escalating in a manner not seen in recent memory. What began as isolated tit-for-tat exchanges has evolved into a sustained military campaign, with Israel now openly targeting strategic sites in and around Tehran. Unlike previous flare-ups, which were short-lived and largely contained, this latest round appears more prolonged, more calculated and more dangerous.
The situation has rapidly shifted from regional volatility to a potential global flashpoint. Intelligence reports and media outlets, including Israel’s Channel 12, suggest that US military involvement could be imminent, potentially beginning within the next 24 hours. This marks a serious inflection point. Israel seems intent on widening the scope of engagement, either to apply overwhelming pressure on Tehran or to compel direct American support. Former President Trump’s latest post — signalling tacit approval or preparedness — only fuels speculation that Washington may no longer be on the sidelines.
For markets, the implications are clear: this is not just about geopolitics; it’s about global risk re-pricing. The strategic threat to oil infrastructure and shipping routes, especially the Strait of Hormuz — carries significant knock-on effects for inflation, energy security, and monetary policy. Already, crude prices are rising, safe-haven flows are returning, and traders are recalibrating interest rate expectations in light of renewed global uncertainty.
Against this backdrop, we explore how these dynamics are affecting the dollar, the euro, and sterling — and what may lie ahead.
Fear Returns, and So Does the Dollar
Hopes for de-escalation in the Middle East faded quickly as Israel intensified strikes on Iran, with reports suggesting US military involvement could begin imminently. Markets have responded in kind: WTI crude has rebounded to $75, equities have retreated, and safe-haven flows have returned. The US dollar has gained 0.8%, edging back toward its 20-day average.
Amid rising geopolitical tension, investors are also bracing for today’s Fed decision. Markets now expect just one rate cut this year, down from two, as policymakers balance softer inflation with ongoing uncertainty around tariffs and supply chains. The updated dot plot may still signal a gradual path toward the neutral rate of 3.0%, with cuts pencilled in for 2026 and beyond.
Euro Rally Echoes 2017 and 2020
EUR/USD continues to climb, fuelled by a powerful mix of technical momentum and shifting macro sentiment. April’s “Golden Cross” — when the 50-day moving average crossed above the 200-day — marked a potential long-term trend change. Since then, the euro has posted five higher monthly closes in six months.
This rally shares traits with the 2017 and 2020 surges, driven by both a turn away from dollar dominance and a broader macro reset. Crucially, EUR/USD has reclaimed the psychologically important $1.1000 level, which acted as support for five years before flipping to resistance in 2022. With that lid now lifted, the rally has deeper technical and emotional significance for market participants.
Sterling Faces a Fragile Landscape
Sterling slid 1.10% against the dollar, its biggest drop since April, as renewed Middle East tensions drove oil prices higher and investors towards safe havens. This morning’s CPI beat (3.4% vs. 3.3% forecast) offered modest support, but inflation remains sticky, with goods prices rising at their fastest pace in over a year.
Markets still price a 74% chance of an August BoE rate cut, despite elevated inflation. Combined with a more hawkish Fed stance, this is eroding the pound’s yield advantage. Technically, GBP/USD has broken below its 21-day moving average, with further downside likely if the 50-day ($1.3381) fails. GBP/EUR has fallen for eight straight sessions, now sitting below all major moving averages with little support until €1.1500.
