Heightened geopolitical tensions in the Middle East, particularly between the United States and Iran, have fueled risk aversion and volatility across major currency pairs on Monday. The NZD/USD pair declined by 0.52% to trade around 0.5868, pressured by a stronger US Dollar as investors sought safe-haven assets amid uncertainty. This environment has been exacerbated by incidents such as drone attacks and reported missile strikes near the Strait of Hormuz, a critical chokepoint for global oil transport. While Tehran warned of a forceful response to any US intervention, Washington denied any direct hit on its vessels, highlighting ongoing uncertainty and the potential for energy supply disruptions that are keeping oil prices elevated and reinforcing global inflation risks [1][2].
The US Dollar has strengthened broadly, supported by rising US Treasury yields and market expectations that the Federal Reserve may keep interest rates higher for longer or even raise them further if inflation persists. The CME FedWatch tool indicates that the probability of a rate hike early next year has increased notably in recent days [1]. In contrast, the Reserve Bank of New Zealand (RBNZ) remains cautious, with Monetary Policy Committee member Prasanna Gai emphasizing a 'look-through' approach to temporary supply shocks and stating that conditions for pre-emptive tightening are not currently in place. Analysts at BNY note that the RBNZ is prioritizing support for the domestic economy over immediate responses to inflation, following a series of aggressive rate cuts in 2025 [1].
In Europe, the EUR/GBP cross edged higher to 0.8645, recovering from an intraday low of 0.8629, as Middle East tensions lifted volatility and UK political uncertainty added modest pressure on the British Pound. A fire at a petroleum site in Fujairah, UAE, was reported after a drone attack from Iran, and conflicting reports emerged regarding missile strikes on a US naval vessel near Jask—while Iran’s Fars news agency claimed two missiles struck the vessel, a US official denied any American ship was hit [2]. The disruption of flows through the Strait of Hormuz, which carries around 20% of global oil supply, has kept the cross under downside pressure since the onset of the US-Iran conflict [2].
Both the UK and Eurozone are exposed to rising energy prices, but the UK is relatively less dependent on imported energy than the Eurozone. This has led traders to favor the Pound over the Euro, anticipating that the Bank of England (BoE) may be forced to tighten policy if inflation, which remains well above the BoE’s 2% target, worsens. In contrast, the European Central Bank (ECB) is expected to remain more cautious due to the Eurozone’s higher exposure to energy shocks and their potential impact on growth. Markets are currently pricing in at least two rate hikes from both central banks, but the outlook remains highly dependent on incoming data and energy price dynamics [2].
Political developments in the UK are also in focus, with local elections on Thursday and polls suggesting potential losses for Prime Minister Keir Starmer’s Labour Party. A leadership contest could be triggered if the leader resigns or if a challenger secures the backing of at least 20% of Labour MPs [2].
CONCLUSION
Geopolitical tensions in the Middle East are driving significant volatility in currency markets, strengthening the US Dollar and pressuring both the New Zealand Dollar and the Euro. Central banks are responding cautiously, with the RBNZ and ECB prioritizing economic stability over immediate tightening, while the BoE faces pressure from persistent inflation. Market participants remain focused on developments in the Strait of Hormuz and upcoming UK political events for further direction.