Written by US and Iran double down on war
As the second week of the Iran conflict comes to a close with no end in sight, markets are now in full risk-averse mode, as they grapple with the realities of the war. Hopes earlier in the week that the war could end “very soon” are now a distant memory, as President Trump seems to be ratcheting up his rhetoric against Tehran.
Posting on his Truth Social platform early on Friday, Trump struck a defiant tone, warning “watch what happens today”, showing no indication that he’s ready to scale back the attacks on Iran.
In the meantime, Iran’s new supreme leader, Mojtaba Khamenei, issued his first statement since his appointment, pledging to continue blocking the Strait of Hormuz, even as questions swirl about his health and whereabouts.
Market fallout deepens
None of this bodes well for risk appetite, which seems to have dwindled completely over the course of the week. The longer the conflict drags on, and more specifically, the longer the Strait of Hormuz stays shut, the bigger the effect of the energy shock on the global economy.
With inflation expectations soaring since the onset of the war, the Fed is the only major central bank that’s not anticipated to hike interest rates. But even for the Fed, rate cut expectations are fading quickly, with a single 25-bps reduction no longer fully priced in.
Stocks are extending their slide on Friday, with Japan’s Nikkei headed for weekly losses of more than 3%. Having slid more sharply last week, European bourses look to finish this week with much milder losses, outperforming Wall Street somewhat.
The US dollar, though, remains the star of the show as far as safe havens are concerned, climbing to the highest since late November against a basket of currencies, while gold is struggling to stay atop the $5,100 level.
No relief from higher energy prices
Perhaps what’s been the most alarming for markets this week is Trump’s lack of concern for higher oil prices. Instead, the President has been boasting about how America, being the biggest oil producer in the world, will profit from the jump in crude oil prices.
Moreover, with the US yet being unable to guarantee safe passage to ships sailing through the Strait of Hormuz, efforts to ease a potential oil supply crunch by releasing reserves and temporarily allowing countries to buy Russian oil have had little impact in calming markets.
Oil futures, whilst they remain below Monday’s peak, have been steadily rising since Wednesday, with Brent crude holding above $100 a barrel and WTI oil coming close to hitting $98 a barrel earlier today.
Trump attacks Powell again
The war also poses a new threat to the Fed’s independence, as Trump has been hounding Chair Powell again, calling on him to lower interest rates, even as inflation risks have shot up from the Middle East turmoil.
The PCE inflation data for January due later today will probably not have a huge impact, nevertheless, any upside surprises would put the Fed in a worse position heading into the crisis.
Yen steadier on intervention threat, pound hit by weak UK data
The war has also cast a negative light on the yen, given the Japanese economy’s reliance on oil imports. The dollar is fast approaching the 160-yen level, seen by many as the threshold for intervention by Japanese authorities. Remarks by Finance Minister Satsuki Katayama earlier in the day that “the government stands ready to act at any time” helped the yen to bounce back from 20-month lows.
The pound is not having such a great session either, as disappointing monthly GDP data for January have dented hopes of a rebound in the UK economy at the start of 2026. Sterling was last trading 0.5% lower at $1.3270.
By XM.com
