Over the weekend, tensions in the Middle East intensified as the United States struck Iranian military installations on Kharg Island, Iran’s main oil export hub, prompting Tehran to retaliate with attacks on neighboring countries, including the United Arab Emirates (UAE) and Iraq. Hezbollah claimed responsibility for targeting the US embassy in Baghdad, further escalating the situation [2][3]. US President Donald Trump stated that the US is not yet prepared to make a deal with Tehran to end the war, and Israel’s military announced plans to continue its campaign for at least three more weeks [2]. France’s President Emmanuel Macron called for the restoration of freedom of navigation through the Strait of Hormuz and urged Iran to end attacks against regional countries [1].
These developments have led to notable movements in major currency pairs. The EUR/USD pair remains defensive around 1.1430, with upside potential limited due to increased safe-haven flows amid geopolitical risks [1]. The AUD/USD pair holds positive ground near 0.6990, but traders are closely monitoring the ongoing US-Israel war with Iran, as heightened uncertainty could boost the US Dollar as a safe-haven currency [2]. The USD/JPY pair opened lower at around 159.50, following comments from Japanese Finance Minister Satsuki Katayama, who pledged to monitor market developments and address excessive volatility. Despite the initial gap lower, USD/JPY maintains a mildly bullish bias, supported by technical indicators, with immediate support at 159.00 and resistance at 160.00 [3].
Market participants are also awaiting key central bank decisions this week. The US Federal Reserve is expected to keep interest rates steady at 3.5% to 3.75% during its policy meeting on Wednesday, while the European Central Bank is widely anticipated to hold rates unchanged on Thursday [1]. No forward-looking statements or analyst opinions regarding the Australian Dollar or Japanese Yen were provided in the sources, but technical analysis suggests buyers remain in control of USD/JPY as long as it stays above key support levels [3].
According to [1], any signs of rising geopolitical risks in the Middle East could continue to boost safe-haven currencies such as the US Dollar and act as a headwind for risk-sensitive pairs like EUR/USD and AUD/USD. The formation of a coalition to secure the Strait of Hormuz is reportedly underway, though the timing of operations remains uncertain [3].
CONCLUSION
Escalating Middle East tensions have triggered significant volatility across major FX pairs, with safe-haven flows supporting the US Dollar and weighing on risk-sensitive currencies. Market participants are closely watching geopolitical developments and upcoming central bank decisions for further direction. The situation remains fluid, and continued uncertainty could sustain elevated volatility in the currency markets.