By: Payel
Published on: Jun 17, 2025
Global financial markets are on high alert as escalating conflict between Israel and Iran ignites significant volatility, most notably in the energy sector. Oil prices have jumped sharply on mounting fears that the confrontation could spiral, threatening crucial energy infrastructure and disrupting the flow of oil through the world's most critical maritime chokepoints. Investors are scrambling to assess the far-reaching implications of this geopolitical flashpoint, which is sending shockwaves through commodity and currency markets alike.
This heightened sense of risk has pushed oil to the forefront of market concerns, with traders pricing in a significant "war risk" premium. Meanwhile, traditional safe-haven assets like gold are experiencing turbulent trading as investors weigh the uncertain geopolitical landscape. In the currency markets, the British pound is treading water, caught between domestic economic pressures and the global flight to safety, as traders cautiously await pivotal interest rate decisions from the US Federal Reserve and the Bank of England. This blog provides a comprehensive analysis of the unfolding situation, examining the intricate connections between geopolitical tensions, commodity price swings, and central bank policy in a world on edge.
The oil market has reacted swiftly and decisively to the escalating tensions in the Middle East. Following reports of Israeli strikes on Iranian nuclear and missile facilities, the threat of a wider regional conflict has become a stark reality, causing a surge in oil prices. Brent crude futures, the international benchmark, saw a notable gain of 0.9% to trade at $73.92 a barrel, while West Texas Intermediate (WTI) futures, the US benchmark, climbed 1.5% to $72.83 a barrel. This recent jump builds upon an already significant 7% surge from the previous Friday, highlighting the market's profound anxiety.
At the heart of these concerns lies the strategically indispensable Strait of Hormuz. This narrow waterway is the jugular vein of the global oil market, with approximately 30% of all seaborne oil and 20% of liquefied natural gas (LNG) passing through it daily. Any disruption, however temporary, could have catastrophic consequences for global energy supplies and prices.
Lazard Geopolitical Advisory (LGA) has issued a stark warning about the potential fallout. In a recent note, the advisory firm stated, “A temporary disruption of the Strait of Hormuz...could push oil prices upwards of $120 per barrel and would likely require US direct involvement to secure safe passage for energy flows.” Even without a formal closure of the strait, the LGA cautions that “oil markets will see continued volatility as the risk of a disruption evolves.” The mere threat of instability is enough to keep prices elevated and traders on edge.
Priyanka Sachdeva, a senior analyst at Phillip Nova, eloquently captures the market sentiment: “The conflict between Iran and Israel is still fresh and brewing, and investor sentiments may still be holding on to the 'war risks'." This sentiment is amplified by the cautious positioning of traders ahead of the Federal Reserve's upcoming policy decision, which is "ensuring higher-paced price reactions in oil.”
While the potential loss of Iranian oil supply—a significant contributor to global markets—would undoubtedly tighten balances, some analysts believe the market has a buffer. Analysts at ING have noted that while a loss of Iranian supply "would wipe out the surplus that was expected in the fourth quarter of this year," there is spare capacity that could be brought online. They point out that “OPEC sits on 5m b/d of spare production capacity, and so any supply disruptions could prompt OPEC to bring this supply back onto the market quicker than expected.” However, the speed and willingness of OPEC to act in such a scenario remain uncertain, adding another layer of complexity to an already tense situation.
As a traditional safe-haven asset, gold typically thrives in times of geopolitical and economic turmoil. The recent flare-up in the Middle East has indeed drawn strong inflows into the precious metal, pushing it towards recent highs. However, the price action has been far from a one-way street. Gold futures saw a slight easing in early European trading, losing 0.4% to trade at $3,404.20 per ounce, while the spot gold price slipped 0.8% to $3,386.63 per ounce.
This volatility reflects the complex interplay of emotions driving the market. As Tim Waterer, chief market analyst at KCM Trade, explains, "Market sentiment continues to swing between escalation and de-escalation regarding events in the Middle East, and these back-and-forth sentiment shifts are what is driving the gold price's moves either side of the $3,400 level."
On one hand, the deep-seated uncertainty is providing a strong floor for gold prices. The potential for the conflict to widen, coupled with ongoing global economic anxieties, reinforces gold's appeal as a store of value and a hedge against the unknown. Waterer suggests that "there is enough prevailing uncertainty surrounding both tariff wars and actual wars to buttress the gold price and keep it within sight of a potential return to $3,500."
On the other hand, the sharp rally in gold prices has tempted some investors to cash in their profits. This profit-taking is creating short-term downward pressure on the metal, leading to the observed price fluctuations. For now, gold remains in a delicate balance, with its future trajectory heavily dependent on the day-to-day developments in the Middle East and the broader global risk sentiment.
In the currency markets, the British pound is navigating a challenging environment, trading broadly flat against both the US dollar and the euro. Sterling held steady at $1.3500 against the greenback and was unchanged against the euro at €1.1735. This subdued trading reflects a "wait-and-see" approach from investors as they brace for a crucial week of central bank announcements.
The US Federal Reserve is set to announce its latest monetary policy decision on Wednesday, followed by the Bank of England (BoE) on Thursday. While both central banks are widely expected to keep their benchmark interest rates on hold, the accompanying forward guidance and commentary will be scrutinized for any clues about the future path of monetary policy.
The US dollar index, which measures the greenback against a basket of six major currencies, has risen 0.2% to $98.18, benefiting from a flight to safety amid the global uncertainty. Fed officials have indicated that the current policy rate of 4.25% to 4.5% is likely to remain in place for an extended period. Policymakers are carefully assessing the potential inflationary effects of the current administration's economic policies, which is complicating the outlook for any potential rate cuts.
Across the Atlantic, the Bank of England faces a similar predicament. The BoE is expected to maintain its benchmark rate at 4.25% as it grapples with persistently high inflation, the economic fallout from rising geopolitical risks, and mixed signals from the domestic economy. The pound's performance in the coming weeks will be heavily influenced by the tone of the BoE's statement and how it balances the competing pressures of inflation and slowing growth in a volatile global environment.
The risk-off sentiment has also spilled over into the equity markets. London's benchmark FTSE 100 index was trading lower, down 0.5% to 8,828 points. The market mood was further soured by reports that US President Donald Trump had cut short his attendance at the G7 summit in Canada to convene a meeting with the National Security Council, underscoring the gravity of the international situation.
The interconnectedness of the global financial system means that a geopolitical flashpoint in one region can have immediate and far-reaching consequences for markets worldwide. The escalating conflict between Israel and Iran serves as a stark reminder of this reality. The surge in oil prices, the volatile trading in gold, and the cautious stance in currency and equity markets all point to a new landscape of heightened risk.
For now, investors and policymakers are left to navigate a deeply uncertain environment. The trajectory of the conflict in the Middle East will be the single most important driver of market sentiment in the near term. Any signs of de-escalation could see a sharp reversal in the "war risk" premium currently priced into oil and a potential pullback in gold. Conversely, any further aggression could send commodity prices soaring and trigger a more profound flight to safety. As the world watches with bated breath, financial markets remain on a knife's edge, bracing for the next chapter in this unfolding geopolitical drama.
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