The ongoing US-Iran conflict has significantly impacted global financial markets, with energy prices surging and central banks reassessing their policy stances. Oil prices have risen sharply, with WTI pushing above $90 per barrel despite the announced release of 400 million barrels from strategic reserves and expectations of a short conflict. DBS notes that market confidence in restoring flows through the Strait of Hormuz remains low, and reserve releases are seen as only a short-term solution to an estimated 25 million barrels per day loss of output due to the conflict [3]. Iran reportedly targeted two oil tankers in the region, further raising concerns about disruptions to global energy supply [4].
The energy shock is fueling inflationary pressures globally. ING highlights that US headline inflation is likely to move back above 3% in the second quarter and may not drop below 3% until the end of the year, with risks that 2% inflation is not achieved until the second half of 2027. Rising oil and gasoline costs, along with increased logistics and airfare prices, are expected to keep inflation elevated. The Federal Reserve is expected to remain cautious, with markets now pricing in only 25-30 basis points of easing by December, down from more than 50 basis points before the conflict began [2][4].
In Europe, both Deutsche Bank and Nomura expect the European Central Bank (ECB) to keep policy unchanged at its 19 March meeting, despite heightened uncertainty and upside inflation risks. Deutsche Bank emphasizes the ECB's likely reiteration of flexibility and commitment to price stability, while Nomura projects that March HICP inflation will be 0.5-0.7 percentage points higher due to the conflict, raising their forecast for March 2026 to 2.5% year-on-year. Nomura sees June as the earliest realistic window for potential ECB rate hikes, possibly twice, but expects the ECB to wait for evidence of persistent inflation or de-anchored expectations before acting [1][6]. Markets are now fully pricing in an ECB rate hike as soon as July, but the Euro remains under pressure due to the region's reliance on imported energy and the negative economic outlook [4].
Currency markets have responded strongly to the conflict. The US Dollar has strengthened as a safe-haven asset, with the Dollar Index (DXY) trading around 99.50, up nearly 0.22% on the day. EUR/USD has extended losses for the third straight day, trading around 1.1525, as traders rotate into the US Dollar amid global uncertainty [4]. The AUD/JPY cross has surged to its highest level since 1990, supported by Australia's status as a net energy exporter and speculation about further RBA rate hikes. However, Rabobank warns that prolonged geopolitical tensions and higher volatility could trigger sharp pullbacks, especially if risk-off sentiment prevails [5].
In Latin America, Brazil and the Brazilian Real (BRL) have shown resilience due to commodities and high real rates. BNY notes that premiums for available oil in Brazil have risen to $13 per barrel above benchmarks, and a 50 basis point rate cut by COPOM to 14.50% is expected. Despite this, real rates will remain in double digits, helping anchor the exchange rate. However, BNY cautions that Brazil may struggle to sustain its outperformance versus regional peers as global inflation risks shift and policy easing continues [7].
CONCLUSION
The US-Iran conflict has triggered a surge in energy prices and heightened inflation risks, prompting central banks to adopt a cautious stance. The US Dollar has strengthened on safe-haven demand, while the Euro and other currencies face pressure from rising energy costs and uncertain economic outlooks. Market participants are closely watching upcoming central bank meetings for policy signals as inflation remains a key concern.