- They may receive support from rising oil prices.
- Geopolitics is driving up inflation in Japan.
The US dollar gained about 0.8% at the start of the week, which may seem like a relatively muted reaction to developments in the Middle East. Investors are wondering how long the confrontation will last. Will Donald Trump end military action soon, or prolong it, risking surpassing $100 per barrel and accelerating? The second option would be a blow to the oil import-oriented eurozone and to the euro.
Investors are waiting for signals from the , whose meeting will take place in just over two weeks, on their priorities in terms of risks: whether to focus on inflation risks, financial market disruptions or stabilization of the labor market and real inflation.
The market narrative heading into the weekend was that labor market stabilization amid slowing inflation allowed the Federal Reserve to resume rate cuts around June. This made the medium-term outlook for the US dollar bearish.
The reduction in the average tariff rate following the Supreme Court ruling on duties will further slow down prices. To reduce rates, companies underprice goods, overprice transportation and insurance services, or ship products through Mexico. These actions explain why US inflation is not rising as quickly as expected.
Right now, the narrative driving markets is that rising oil prices could lead to a prolonged pause in Federal Reserve rate cuts. This favors the dollar bulls. It also goes against the EURUSD and some other European currencies, as they are closer to the conflict and are forced to buy energy resources whose price has skyrocketed.
According to the Monex Group, a rise in Brent to $100-120 per barrel would be equivalent to a supply shock in Japan and would derail Sanae Takaichi's efforts to stimulate the economy. In this scenario, inflation will accelerate by 0.5 percentage points. Its slowdown in January-February seemed to have given the prime minister a free pass. However, events in the Middle East risk changing everything, which will affect the exchange rate.
Gold appears to be one of the main beneficiaries of the US and Israeli military attacks against Iran. Its price surpassed $5,400 per ounce, where it had briefly peaked in January. The precious metal recorded its seventh consecutive monthly gain in February, its longest winning streak since 1973. The kidnapping of the Venezuelan president, tariff threats against Europe over Greenland and, finally, the conflict in the Middle East create the perfect geopolitical backdrop for a flight to safe haven.
Investors are responding more to the dynamics of risk premiums than to fundamental factors. In such conditions, gold feels at home.
He FxPro Analyst team
