Markets turned risk-averse at the start of the week as Israel and Iran exchanged strikes for the first time since their ceasefire agreement on April 8. Iran fired missiles at Israel on Sunday in retaliation for an Israeli attack in Lebanon, which Israel intercepted and responded to by striking military targets in western and central Iran. Explosions were reported in Isfahan, Tabriz, and Tehran, and Israeli air force targeted a petrochemical complex in Mahshahr. Iran’s Islamic Revolutionary Guard Corps announced attacks against Israeli air bases Nevatim and Tel Nof, stating readiness for widespread operations on all fronts [1][2]. Iranian officials warned that any Israeli attack against Lebanon or Iran would be met with a 'crushing and comprehensive response.' Iran’s ambassador to Moscow indicated that the Strait of Hormuz would remain open but under new conditions, including a transit fee, to be set by Iran and Oman [2].
The geopolitical turmoil has boosted safe-haven flows, supporting the US Dollar. The US Dollar Index reached its highest level since early April, climbing above 100.00 before retreating slightly. The barrel of West Texas Intermediate (WTI) crude oil gained more than 4% on the day, trading near $92.50 [1]. Over the past seven days, the US Dollar was strongest against the New Zealand Dollar, up 2.87%, and also posted gains against other major currencies, including the British Pound (+0.85%) [1].
The GBP/USD pair traded with mild losses around 1.3340 during European trading hours on Monday, pressured by Middle East tensions and rising expectations of a US interest rate hike. The US economy posted a third straight month of strong job gains in May, with Nonfarm Payrolls rising by 172K, beating forecasts and supporting the case for a potential Fed rate hike later this year [2]. In contrast, Bank of England Governor Andrew Bailey delivered dovish remarks, stating the UK central bank is in no rush to raise rates amid uncertainty from the Iran conflict and weak UK growth. Financial markets had expected the BoE to cut rates twice this year to 3.25%, but since the US-Iran war began, forecasts now anticipate a 25 basis point rise before December [2].
US President Donald Trump told the Financial Times that Iran’s strikes had not changed his desire to conclude negotiations with Iran and said Israeli Prime Minister Benjamin Netanyahu will have no choice but to accept a deal with Iran [1].
CONCLUSION
Escalating Middle East tensions have triggered risk aversion, strengthening the US Dollar and weighing on the British Pound. Robust US jobs data and expectations of a Fed rate hike further support the Greenback, while dovish signals from the Bank of England and geopolitical uncertainty pressure GBP. The situation remains fluid, with market participants closely watching for further developments.