A significant escalation in geopolitical tensions in the Middle East, specifically involving the United States, Israel, and Iran, has led to major disruptions in global energy markets and impacted multiple asset classes. The effective closure of the Strait of Hormuz, a critical maritime route handling roughly one-fifth of global oil consumption, has been cited as a key factor driving oil prices higher. West Texas Intermediate (WTI) crude surged more than 9% in the previous session and is currently trading near $95.20 per barrel, with prices up over 40% since the start of the conflict. The International Energy Agency (IEA) described the situation as 'creating the largest supply disruption in the history of the global oil market' [3][5]. In response, Australia announced the release of up to 762 million litres of fuel from reserves and a reduction in minimum fuel stockholding requirements by up to 20% to stabilize domestic supply [3].
Iran’s new supreme leader, Mojtaba Khamenei, in his first public remarks, stated that the closure of the Strait of Hormuz should remain a 'tool to pressure the enemy' and warned that all US military bases in the region should be closed immediately or face potential attacks [2][3][4][5]. US officials from the Pentagon and National Security Council admitted to underestimating Iran’s willingness to close the Strait in response to US military strikes [3][4].
The surge in oil prices has fueled concerns about rising inflation globally. In the US, this has led to a reduction in expectations for Federal Reserve rate cuts, as oil-driven inflation complicates the policy outlook. The US Dollar Index (DXY) trades near 99.70, slightly lower on the day but poised for its second consecutive weekly gain and at its highest levels since November 2025, supported by safe-haven flows amid the ongoing conflict [4]. The upcoming US Personal Consumption Expenditures (PCE) Price Index report is expected to show a headline increase of 2.9% year-over-year and a core rise of 3.1% for January, with softer-than-expected outcomes potentially weighing on the Greenback [4][5].
Gold (XAU/USD) has rebounded during the Asian session, recovering part of its recent losses as safe-haven demand counters concerns over inflation-driven Fed rate policy. Despite this, gold is still on track for a second consecutive weekly loss, with technical indicators suggesting fading bearish momentum but caution warranted before aggressive directional bets [2].
Currency markets have also been affected. The Canadian Dollar (CAD) remains flat against the US Dollar (USD), with the USD/CAD pair trading around 1.3640. The CAD may strengthen if oil prices continue to rise, given Canada’s status as the largest crude exporter to the US. However, the downside for USD/CAD is limited as the Fed is expected to keep rates unchanged at its next meeting [5]. The AUD/JPY cross remains subdued above 112.50, pressured by a slight recovery in the Japanese Yen (JPY) on intervention fears, but the path of least resistance is seen to the upside due to expectations of a Reserve Bank of Australia (RBA) rate hike next week [1].
According to [1], the recent surge in crude oil prices poses stagflation risks for Japan, complicating the Bank of Japan’s normalization efforts, while traders anticipate a potential RBA rate hike. Meanwhile, the focus across markets remains on upcoming inflation data and further geopolitical developments, which are expected to provide additional direction.
CONCLUSION
The closure of the Strait of Hormuz and escalating Middle East tensions have triggered a sharp rise in oil prices, stoked inflation fears, and led to heightened volatility across commodities and currencies. Markets are bracing for further developments, with upcoming US inflation data and central bank meetings likely to shape the next moves. The overall sentiment remains cautious and risk-averse amid ongoing geopolitical uncertainty.