Market Brief: Volatility rises as conflict spreads, but currency movements remain restrained

Good morning. Financial markets are experiencing violent price action after the weekend’s US-Israeli strike on Iran triggered a classic—if short-lived—flight to safety and a sharp repricing in global energy markets. With shipping through the Strait of Hormuz grinding to a standstill and Gulf producers curtailing output, crude prices are up roughly 9 percent from Friday’s close, while natural gas benchmarks in Europe and Asia have surged more than 30 percent. Qatar’s state-owned energy company—one of the world’s biggest—invoked force majeure this morning, pausing liquefied natural gas delivery after Iran hit some of its facilities with drone strikes, and authorities in Saudi Arabia shut production in the aftermath of an attack on the Ras Tanura oil refinery.

Currency moves have been relatively modest, but are largely tracking countries’ energy exposure. The yen, euro and pound are coming under selling pressure as investors downgrade economic growth prospects, while the Canadian dollar, Norwegian krone, and US dollar are outperforming in narrow trading ranges.

Spillovers to monetary policy expectations are beginning to emerge as investors brace for a more prolonged conflict. A sustained disruption in shipping through the Strait of Hormuz could keep energy prices elevated, raise inflation expectations, and filter into consumer price baskets across advanced economies, complicating central banks’ efforts to ease policy. Market-implied odds on rate cuts from the Federal Reserve and the Bank of England are drifting lower, while expectations for rate hikes in the euro area and further policy normalisation in Japan are edging higher, reflecting increasingly asymmetric inflation risks. The United States—now broadly energy self-sufficient after the shale boom—is relatively insulated from such a shock, whereas the euro area, China, and Japan remain far more exposed due to their reliance on imported hydrocarbons.

Confusion over Washington’s objectives is casting doubt on both the scope and duration of the conflict, with President Donald Trump and his allies oscillating between limited aims—such as curbing Tehran’s nuclear and missile capabilities—and more ambitious calls for regime change. This strategic ambiguity has been matched by shifting timelines, with the president alternately suggesting a campaign lasting days, weeks, or longer, even as US and Israeli forces strike hundreds of targets and Iran retaliates across the Middle East. Ultimately, the impact on the global economy and financial markets will hinge on whether Washington is seeking to achieve narrow military goals that allow for a swift declaration of success, or is pursuing the far more complex and uncertain task of reshaping Iran’s political order—an outcome for which little concrete planning appears to exist. For markets and the global economy, the tumult could end in minutes, or last months.

Events in the Middle East will undoubtedly dominate price action through the week, but several US economic data releases could move markets. Today’s Institute for Supply Management manufacturing survey is expected to cool from January’s strong reading as new orders and production soften, and Wednesday’s Beige Book should echo that moderation across the Fed’s districts. Friday’s retail sales report may capture the usual post-holiday lull in consumption. The February non-farm payrolls release—also due Friday—is forecast to show job growth slowing to around 60,000 from 130,000 previously, with the unemployment rate holding at 4.3 percent; however, an unusually cold survey week raises the risk of a negative print, which—alongside potential downward revisions—could prompt another recalibration in monetary policy expectations.

Against this backdrop, hedgers should be prepared to seize the opportunities—and a manage the risks—associated with a widening in trading ranges in the coming days.

Market Overview

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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