Escalating geopolitical tensions in the Middle East, particularly the conflict involving the US, Israel, and Iran, have significantly impacted currency markets during the early Asian session on Thursday. The USD/CAD pair fell to near 1.3630 as the Canadian Dollar (CAD) strengthened against the US Dollar (USD), largely due to a jump in crude oil prices. The rise in oil prices was attributed to concerns over potential supply disruptions in the Strait of Hormuz, a key transit route, which provided support to the commodity-linked CAD. Canada, being a major oil exporter, typically benefits from higher oil prices, which increase aggregate demand for its currency [1]. Monex Europe strategists commented, 'We continue to expect volatility to stay elevated, but unless the conflict prompts a deeper global growth scare, oil support should help the loonie outperform European peers' [1].
Meanwhile, the EUR/USD pair traded lower around 1.1635, as the USD strengthened against the Euro (EUR) amid heightened safe-haven flows triggered by the ongoing conflict. Israel's military announced a new wave of strikes targeting military infrastructure in Tehran, and US officials indicated plans to strike progressively deeper into Iran. These developments have led to a 'flight-to-safety' among traders, bolstering the USD and weighing on the EUR/USD pair [2].
Surging oil and gas prices due to the Middle East conflict have also fueled fresh inflation fears in the Eurozone. Traders are now placing bets on a potential European Central Bank (ECB) rate hike this year, with money markets pricing in nearly a 40% probability of such a move by year-end, following hotter-than-expected inflation data for February [2]. ECB policymaker Martins Kazaks stated that the ECB should 'sit tight' and keep interest rates steady for now, given the uncertainty surrounding the war in Iran [2].
On the US side, upbeat economic data may help limit USD losses. The Institute for Supply Management (ISM) reported that the Services Purchasing Managers’ Index (PMI) rose to 56.1 in February, up from 53.8 previously and above the market consensus of 53.5, signaling robust economic activity [1]. Traders are also awaiting the release of US weekly Initial Jobless Claims and Eurozone Retail Sales reports later on Thursday, which could further influence market direction [1][2].
CONCLUSION
Heightened Middle East tensions have driven volatility in currency markets, strengthening the USD against the EUR while boosting the CAD due to rising oil prices. Inflation concerns and potential ECB rate hikes are influencing Euro sentiment, while robust US economic data provides support for the USD. The ongoing conflict and upcoming economic reports are expected to keep market volatility elevated.