Escalating tensions between the US and Iran have dominated global financial markets, with the US military conducting its 13th consecutive night of strikes on Iran, targeting military command centers, drone storage facilities, and coastal surveillance sites [1][3][5]. Iran and its allies have retaliated with strikes against US-linked assets in Kuwait, Bahrain, and Jordan, while Iran-aligned Houthi forces attacked two Saudi oil tankers in the Red Sea, intensifying supply disruption concerns and lifting crude oil prices to fresh highs since June 11 [3][5]. US President Donald Trump warned Iran and the Houthis of 'major military punishment' and imposed sweeping new tariffs ranging from 10% to 12.5% on 60 key trading partners, covering 99.4% of US imports, threatening to reignite a global trade war [3][5].
These developments have fueled inflation fears and bolstered expectations of more hawkish central bank policies. The European Central Bank (ECB) kept rates unchanged at its July meeting but signaled openness to a rate hike in September, with markets pricing in a 95% chance of a 25-basis-point hike and a similar probability for December [1]. ECB President Christine Lagarde stated that inflation is expected to remain 'well above target' until the first half of 2027 [1]. The US Federal Reserve is also expected to raise rates, with money markets pricing in a 35.8% chance of a hike this month and an 82.1% probability of at least a quarter-point hike in September [2]. Analysts at MUFG note that short-term yields have risen more in Europe than in the US, resulting in yield spreads moving against the USD [1].
The US Dollar has benefited from safe-haven flows and hawkish Fed expectations, reaching a nearly one-month high [3][5]. The USD/CHF pair continued its winning streak for the fifth day, trading around 0.8170, as the Swiss Franc's gains were capped by anticipated SNB interventions [2]. The NZD/USD pair attracted buyers but remained below 0.5800, with stronger-than-expected New Zealand inflation data supporting expectations for an RBNZ rate hike in September [3]. Gold (XAU/USD) extended its slide below $4,050, undermined by higher US yields, inflation fears, and Trump's tariffs [5].
In the Asia-Pacific, the AUD/JPY cross traded positively around 114.25, supported by robust Australian employment data (Unemployment Rate at 4.4% in June, Employment Change at 76.3K vs. 15K forecast) [4]. However, Japanese authorities signaled readiness for currency intervention, potentially capping JPY downside [4]. TD Securities highlighted bearish seasonality for AUD/JPY in July and August, suggesting caution as the pair was down in August 71% of the time over the past 20 years for an average loss of -1.5% [4].
Market participants are now focused on upcoming PMI data from the Eurozone, Germany, and the US, as well as the highly anticipated FOMC policy meeting next week [1][3][5].
CONCLUSION
Heightened US-Iran tensions and retaliatory actions have driven oil prices higher, fueling inflation concerns and prompting markets to price in more aggressive rate hikes from major central banks. The US Dollar has strengthened on safe-haven flows and hawkish Fed expectations, while gold and riskier assets have come under pressure. Investors remain cautious ahead of key economic data releases and central bank meetings, with volatility expected to persist.