The ongoing war in the Middle East, involving the United States, Israel, and Iran, has significantly impacted global financial markets, driving a surge in safe-haven demand and affecting major currencies and commodities. Gold (XAU/USD) extended its gains for a second consecutive session on Thursday, trading around $5,190, as investors sought safety amid escalating hostilities. The conflict has seen US and Israeli strikes across Iranian territory and widespread Iranian retaliation, including missile and drone attacks on regional targets and military sites. Notably, a US submarine reportedly sank an Iranian warship off the coast of Sri Lanka, which US Defense Secretary Pete Hegseth described as the 'first such attack on an enemy since World War II.' The broader campaign has now entered its sixth day, intensifying fears of a prolonged conflict [1][2][3].
The heightened geopolitical tensions have led to increased demand for safe-haven assets such as gold and the Japanese Yen. Gold's bullish momentum is supported by a weaker US Dollar, which makes the metal more attractive to foreign buyers. Technical analysis indicates a mildly bullish bias, with gold holding above its 50-day EMA and consolidating after reclaiming the nine-day EMA. The price may explore the upper boundary of its ascending channel at $5,470, with immediate support at the nine-day EMA of $5,160. The all-time high of $5,598 was reached on January 29 [1].
The Japanese Yen also benefited from safe-haven flows, with the USD/JPY pair trading in negative territory near 156.85 during Asian trading hours. The Yen's strength is attributed to escalating conflict in the Middle East and statements from Bank of Japan Governor Kazuo Ueda and Finance Minister Satsuki Katayama, who both emphasized close monitoring of the situation and readiness to take measures if necessary. However, strong US economic data, such as the ISM Services PMI rising to 56.1 in February from 53.8 previously, could provide support for the US Dollar against the Yen [3].
In contrast, the Pound Sterling underperformed, trading down 0.22% around 1.3340 against the US Dollar. The UK faces stagflation risks due to higher energy prices resulting from disruptions in the global oil supply chain, particularly the choking of the Strait of Hormuz. The UK imports a significant portion of its energy, and rising prices could exacerbate inflation, which was already at 3% year-on-year in January, above the Bank of England's 2% target. The GBP/USD pair rebounded from a three-month low of 1.3253 to near 1.3400 on Wednesday, following reports that Iran was open to talks with the US CIA to end the war. However, Tehran later denied these reports, casting uncertainty on the conflict's duration and the Pound's recovery [2].
Market implications include a surge in safe-haven assets, a weaker Pound Sterling due to stagflation fears, and volatility in the US Dollar as traders weigh geopolitical risks, inflation concerns, and central bank policy expectations. The US 10-year Treasury yield rose for a fourth straight session to 4.11%, reflecting market reassessment of risks and economic data [1].
CONCLUSION
The escalation of the Middle East conflict has driven strong safe-haven demand, boosting gold and the Japanese Yen, while pressuring the Pound Sterling amid UK stagflation concerns. Market volatility remains elevated as investors monitor geopolitical developments, energy prices, and central bank responses. The duration and outcome of the conflict remain uncertain, keeping risk sentiment fragile.