Over the weekend, geopolitical tensions in the Middle East escalated sharply after Iran launched multiple rounds of missiles toward Israel, specifically targeting the Ramat David air base, in response to renewed Israeli strikes on Lebanon despite a truce. Israel's military reported that all incoming missiles were successfully intercepted with no casualties, but the incident severely rattled energy markets and delayed the anticipated restart of crude flows through the critical Strait of Hormuz [2][5][6]. The ongoing near-closure of the Strait has effectively cut off vital energy supplies from the Persian Gulf, keeping oil prices elevated. West Texas Intermediate (WTI) crude surged around 4.50%, trading near $90.50 per barrel during the Asian session on Monday, erasing most of Friday's losses [1][5]. OPEC+ approved an increase in July oil production quotas by 188,000 barrels per day, but analysts expect little impact on global supply due to shipping disruptions and Russia's reduced capacity [5].
The currency markets responded to the heightened risk and shifting economic data. The US Dollar (USD) maintained its strength following Friday's upbeat Nonfarm Payrolls report, which showed the US economy added 172,000 jobs in May, beating the 85,000 estimate and previous month's revised 179,000. The unemployment rate held steady at 4.3% [1][2][3][4]. Traders are now pricing in over a 70% chance that the US Federal Reserve will hike interest rates by the end of the year [1][4]. The Canadian Dollar (CAD) slid to a fresh low since late March against the USD, despite rallying oil prices and a strong Canadian jobs report (87,800 jobs added in May, unemployment rate down to 6.6%) [1]. The New Zealand Dollar (NZD) rebounded to near 0.5810 as risk aversion eased and markets priced in a July rate hike by the Reserve Bank of New Zealand, with the Official Cash Rate seen peaking around 3.50% late next year [2].
The Euro (EUR) edged higher above 1.1500, supported by expectations of a European Central Bank (ECB) rate hike to 2.25% in June and another likely in September, according to a Reuters poll. However, persistent Middle East tensions may cap further gains for the Euro, as any escalation could boost the USD as a safe-haven currency [3]. The British Pound (GBP) recovered slightly from a three-week low, but underlying USD strength and UK political turmoil, including a challenge to Prime Minister Keir Starmer's leadership, kept gains limited [4]. The Japanese Yen (JPY) held below 160.00 against the USD following strong Q1 GDP data (0.5% QoQ, 1.8% annualized), beating market estimates and marking the strongest growth since early 2025. Bank lending also rose by 5.7% YoY in May, fueling expectations for a Bank of Japan rate hike at the upcoming June meeting [6].
US President Donald Trump intervened diplomatically, urging Israeli Prime Minister Netanyahu to avoid retaliatory action against Iran and calling on Tehran to resume negotiations. Trump emphasized the risk that further escalation could derail ongoing talks, which he claims are close to a final deal [2][3][4][5][6]. Iranian officials warned that any subsequent Israeli military action would be met with a "crushing and comprehensive" response [6].
CONCLUSION
The escalation in the Middle East has triggered a surge in oil prices and heightened volatility across major currency pairs, with the USD maintaining strength on robust US jobs data and safe-haven flows. Central bank rate hike expectations and geopolitical risks are driving market sentiment, with traders closely watching for further developments. The situation remains fluid, and ongoing diplomatic efforts may influence both energy and currency markets in the coming days.