Tensions rise as U.S. strikes Iran and markets react
President Trump launched airstrikes on three Iranian nuclear sites over the weekend, boosting Israel’s campaign against Tehran’s nuclear ambitions and drawing the U.S. deeper into the region’s unrest. The move surprised many, as Trump had campaigned against foreign interventions and, just days earlier, appeared open to diplomacy.
Markets had priced in diplomatic progress: the euro firmed, the dollar eased, oil fell nearly 3%, and safe havens stayed quiet. That changed quickly. The strikes reversed sentiment, with rising Middle East tensions now supporting the dollar through commodity-related channels.
Iran has threatened to close the Strait of Hormuz, a critical route for global oil shipments. Though any such action would need approval from Supreme Leader Khamenei, the mere threat is enough to keep pressure on markets and shore up the dollar as traders pull back from bearish positions.
Attention now shifts to Fed Chair Jerome Powell’s testimony to Congress. He is expected to stress the Fed’s independence and a data-driven approach, even as some lawmakers push for early rate cuts. Friday’s inflation data may show only a slight rise, but concerns over tariff-driven inflation later this year remain.
If Powell stays cautious and inflation data is soft, the dollar could weaken again. But any hawkish surprise or renewed conflict could give it fresh momentum.
Euro stays cautious as economic signals and global tensions loom
The euro slipped back from the $1.16 mark against the U.S. dollar last week, though it continues to hold above its 21-day moving average, suggesting a period of consolidation. Even so, the currency starts the week on somewhat fragile ground as investors look to eurozone PMI figures for direction. Manufacturing is expected to hover just below the 50-point threshold, pointing to stagnation. Earlier strength from exports to the U.S. is waning, and low consumer confidence continues to weigh on the services sector. With signs of economic fatigue and growing geopolitical pressure from U.S. involvement in the Middle East, the euro remains vulnerable to weaker-than-expected data.
Friday’s inflation figures for the euro area could inject some short-term volatility. While headline inflation has slowed, attention is turning to services prices, which may remain stubbornly high. A stronger-than-expected reading could briefly support the euro if markets interpret it as a reason for the ECB to stay cautious on rate cuts, though a policy shift seems unlikely in the near term.
Looking ahead, the upcoming NATO summit could carry longer-term implications for fiscal policy, as members move toward spending 5% of GDP on defence and resilience. That may eventually raise questions around fiscal differences between core and peripheral eurozone economies.
Outside the bloc, developments in the Middle East and swings in oil prices add further uncertainty. While heightened tensions could trigger safe-haven demand, the euro has shown a mixed response so far, underperforming against the dollar and Swiss franc during periods of risk aversion, but faring better than sterling.
Pound struggles to stabilise as pressures build at home and abroad
The pound found some footing above $1.3400 during early trading in Asia on Monday, recovering slightly to near $1.3425 after tumbling from last week’s high above $1.3600. Sterling endured a difficult week, largely driven by mounting global tensions and the United States stepping directly into the conflict over the weekend. The resulting shift in sentiment towards safer assets weighed heavily on risk-linked currencies such as the pound. Short-term trend indicators, including the 8- and 21-day moving averages, have turned lower, often viewed as a sign of potential further declines. At the same time, domestic economic figures offered little reassurance, with disappointing retail sales data adding to concerns about underlying economic weakness.
The pound now faces pressure on multiple fronts. Internationally, concerns are rising that the conflict could widen, particularly with Iran’s threat to close the Strait of Hormuz, a key passage for around 20% of global oil shipments. Any disruption there could push oil prices higher and strengthen the dollar, making it harder for GBP/USD to recover.
Closer to home, UK economic indicators are flashing warning signs. Government borrowing rose to £17.7 billion in May, slightly above the same period last year, and labour market data pointed to a softening trend. Together, these figures highlight a challenging outlook for the British economy and leave sterling vulnerable to further losses.
