Heightened geopolitical tensions in the Middle East, particularly following Iran's military actions and attacks on merchant ships, have led to increased volatility in global markets, especially in the oil sector. The closure of the Strait of Hormuz and dwindling vessel traffic have pushed crude oil prices higher, with Iran warning that the world should be prepared for crude at $200 a barrel. Bahrain reported that Iran targeted fuel tanks at one of its facilities, and a senior Iraqi port official confirmed that two foreign tankers were hit, resulting in fires and oil leaks. These developments have provided support to the commodity-linked Canadian Dollar (CAD), with the USD/CAD pair trading in negative territory around 1.3600 during early European trading hours on Thursday. Currency strategist Rodrigo Catril from National Australia Bank noted, 'We should expect ongoing volatility in energy prices,' emphasizing that continued disruption in the Strait of Hormuz will maintain upward pressure on oil prices [1].
The persistent geopolitical risks are seen as potentially boosting crude oil prices further, which could underpin the CAD given Canada's status as a major oil exporter. Traders are also closely watching upcoming US economic data, including the weekly Initial Jobless Claims report and the Personal Consumption Expenditures (PCE) Price Index for January, expected to show a headline increase of 2.9% YoY and a core rise of 3.1%. If these reports exceed expectations, the US Dollar could strengthen against the CAD. Meanwhile, markets are pricing in a 99.5% probability that the Federal Reserve will hold interest rates steady at its March policy meeting, according to the CME FedWatch tool [1].
In the currency markets, the EUR/JPY cross has declined to near 183.55, pressured by safe-haven flows amid the Gulf tensions. NBCNews reported that Iran launched its 'most intense operation since the beginning of the war,' firing advanced ballistic missiles toward Tel Aviv and Haifa in Israel. Oman evacuated all vessels from its key oil export terminal at Mina Al Fahal as a precaution. These events have increased demand for the Japanese Yen (JPY), a traditional safe-haven asset, creating headwinds for the EUR/JPY pair [2].
On the Euro side, ECB policymaker Isabel Schnabel stated that new quarterly forecasts will partly incorporate the economic impact of the war in Iran. ECB Governing Council member Peter Kazimir suggested a rate hike may be closer than previously thought, and the central bank could act if the war raises inflation expectations. Swaps pricing now indicates that markets expect the ECB to tighten monetary policy faster, with a rate hike seen as soon as June, according to LSEG data [2]. Technical analysis shows EUR/JPY maintains a mildly bullish bias above the 100-day EMA, with immediate support at 183.10 and resistance at 184.90 and 185.70 [2].
CONCLUSION
Geopolitical tensions in the Middle East have triggered volatility in oil prices and currency markets, supporting the Canadian Dollar and Japanese Yen while pressuring the Euro. The risk of prolonged conflict and supply disruptions is prompting central banks and traders to reassess inflation and rate hike expectations, with the ECB potentially tightening policy sooner. The market impact is high, with ongoing developments likely to drive further volatility across commodities and currencies.