The outbreak of war in Iran has led to a significant surge in oil and gas prices, with oil up 44% and gas up 64% to date, according to BNP Paribas analysts. However, they argue that the current energy shock is less inflationary than the 2022 episode, as demand is weaker and supply constraints have eased. Central banks are now more prepared to react swiftly to counter any spillover effects, and early March 2026 data show limited pass-through beyond energy, though risks remain. The improvement in the Eurozone manufacturing PMI and limited deterioration in household sentiment are seen as positive signals [1].
The US Dollar initially strengthened in response to the energy shock but has lost upward momentum recently. MUFG attributes this to lingering optimism about a quick resolution to the conflict, a higher US policy risk premium, and yield spreads moving against the Dollar. Fed officials have signaled rates may stay on hold, with markets undecided on the next move [2]. Gold retreated from two-week highs, trading around $4,590, down nearly 3.50% on the day, as risk aversion increased following President Trump's remarks about continued military action. Trump stated the US is "on track to complete all of America’s military objectives shortly," but warned of further strikes over the next two to three weeks. The hawkish interest rate outlook, with markets expecting the Fed to keep rates unchanged at 3.50%-3.75% this year, remains a headwind for gold [3].
Other currencies and markets have also reacted to the geopolitical uncertainty. The Mexican Peso has been resilient, supported by strong US export performance and USMCA compliance, with exports to the US rising by almost 6% in 2025. Commerzbank suggests that if the conflict with Iran ends, USD/MXN could fall slightly [4]. GBP/JPY trades in a tight range, with the Japanese Yen holding firm against most peers except the USD and CAD. The Yen was the strongest against the British Pound today, reflecting fragile sentiment amid the ongoing conflict [5].
The Reserve Bank of India has taken steps to curb speculative trading by barring banks from offering INR NDFs, but Societe Generale notes that structural headwinds persist, including FPI outflows, oil shock dynamics, and slowing domestic growth. The 10-year Indian government bond yield has risen to 7.07%, with traders expecting further increases toward 7.20–7.25%. March saw ₹176.86bn ($1.9bn) of FPI debt outflows as oil-shock fears revived concerns over fiscal slippage [6]. The Swiss Franc remains firm, supported by slightly higher CPI inflation and safe-haven flows, with Rabobank expecting another dip toward EUR/CHF 0.90 in coming months [7].
The Bank of Canada maintains a dovish and patient stance, citing inflation near target, weaker GDP, housing softness, and labor market headwinds. Officials note potential CPI spillovers from higher energy prices but see no urgency to adjust policy given geopolitical uncertainty [8]. Central and Eastern European currencies remain under pressure, with ING highlighting holiday-thinned liquidity, geopolitical uncertainty, and elevated EUR/PLN and EUR/CZK levels. Turkish inflation is expected to rise to 32.2% YoY, keeping Central Bank of Turkey rate cuts off the table for the coming months [9].
CONCLUSION
The war in Iran has triggered a sharp rise in energy prices, prompting central banks and markets to adopt a cautious stance. While inflationary risks are present, most policymakers are signaling patience and readiness to respond if needed, with currency and bond markets reflecting heightened volatility and risk aversion. The overall market takeaway is one of elevated uncertainty, with investors closely monitoring geopolitical developments and central bank responses.