Market Mondays: Geopolitical tensions escalate, but markets remain resilient

In this week’s edition of Market Mondays, geopolitical developments in the Middle East dominated the conversation, with markets assessing the impact of US involvement in escalating regional tensions. Despite high-profile military actions and rising risks, market sentiment has remained largely stable, with modest moves in oil, gold, and the US dollar reflecting a cautious but contained response.

US-Iran tensions escalate, Strait of Hormuz in focus

The dominant theme this week was the latest escalation in the Middle East. The US confirmed strikes on three nuclear facilities in Iran, damaging key elements of Iran’s nuclear programme. In response, Iran’s parliament voted to close the Strait of Hormuz—a strategic chokepoint through which roughly 20% of the world’s oil passes.

Despite the rhetoric, markets currently view a full blockade as unlikely. Analysts noted that such an action would harm Iran’s own economy and strain its relationships with key allies like China, which relies heavily on Iranian oil. Additionally, the logistical and political costs of a prolonged closure make it an unattractive option for Iran at this stage.

Oil rises on supply concerns, but rally loses momentum

Oil markets reacted to weekend developments with a sharp gap higher at the Asian open, but gains moderated quickly. The limited move suggests that while the risk premium has increased slightly, markets are not yet pricing in a prolonged supply disruption. Any significant move to block the Strait of Hormuz would likely drive oil sharply higher, but as it stands, prices remain elevated primarily due to the threat of action rather than its actual occurrence. Oil is likely to remain volatile in the coming weeks, with the upside supported by geopolitical risks. A rapid resolution to tensions could see prices fall, but that scenario is currently viewed as unlikely.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)

Gold lacks safe haven momentum

Despite its traditional role as a safe haven, gold has failed to gain traction in response to the recent geopolitical flare-up. Prices attempted to push higher last week but failed to break through key resistance and have since pulled back.

Several factors are acting as headwinds for gold. First, broader risk appetite remains relatively strong, as markets do not yet anticipate a wider conflict. Second, a strengthening US Dollar has placed downward pressure on gold, which is priced in dollars. Finally, uncertainty around Federal Reserve policy has clouded the outlook, with lingering questions about future interest rate cuts.

While long-term drivers for gold remain constructive—such as persistent inflation risks and geopolitical instability—short-term momentum has weakened.

Dollar regains footing amid central bank divergence

The US Dollar has bounced off recent lows, finding support at key technical levels. A bullish divergence on the daily RSI suggests that selling pressure may be easing, even though broader structural themes like de-dollarization and shifting trade flows remain in play.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)

The recent Fed decision was interpreted as slightly hawkish, with policymakers projecting a higher interest rate floor and fewer cuts over the medium term. This has helped underpin dollar strength in the near term.

In contrast, the Japanese Yen has weakened following a relatively dovish signal from the recent Bank of Japan meeting. Despite inflation running above target, the BoJ halved its bond tapering program amid fears of financial instability and expressed a cautious approach to further rate hikes. The divergence between US and Japanese monetary policy has pushed USD/JPY above recent resistance levels, with momentum pointing higher.

Inflation risks, bond yields, and political considerations

With energy prices rising and inflation risks returning, bond yields have edged higher. This dynamic poses a potential challenge for the Trump administration, as rising yields could undermine efforts to ease financial conditions and deliver lower interest rates. Market participants are also watching for possible policy responses, such as the release of oil from the US Strategic Petroleum Reserve or coordinated action with Saudi Arabia to stabilise prices, should oil prices lift materially.

Looking ahead, the key data point on the calendar is the US PCE price index—the Fed’s preferred inflation gauge—due at the end of the week. Markets will assess whether it reflects the inflation concerns raised in the Fed’s latest projections, particularly the expectation that inflation could rise back above 3% by year-end.