Geopolitical tensions between the US and Iran have escalated, with reports of US military strikes on targets in Southern Iran and the interception of a US MQ-9 drone by Iran’s Islamic Revolutionary Guard Corps (IRGC) [1][2][3]. The US described its actions as 'defensive,' while Iran’s Supreme Leader, Mojtaba Khamenei, warned that the US would no longer have a haven in the Gulf region [1][2]. These developments have injected significant uncertainty into global markets, with investors remaining cautious and risk-averse [1][3].
The Euro (EUR) has remained flat against the US Dollar (USD) for a second consecutive day, trading at 1.1645 after rebounding from 1.1624, as investors await clarity on the US-Iran conflict and its implications for global stability [1]. Despite the heightened geopolitical risk, the US Dollar has found support from elevated US yields and a Federal Reserve increasingly focused on inflation risks [3]. According to MUFG’s Derek Halpenny, initial optimism over a potential US–Iran peace deal had pushed the Dollar lower and Brent crude down sharply, but subsequent US strikes have revived uncertainty and supported the Dollar [3]. High beta currencies such as SEK and AUD, as well as EUR/USD, remain vulnerable to further setbacks if peace negotiations falter [3].
Gold (XAU/USD), typically seen as a safe-haven asset during geopolitical turmoil, has paradoxically come under pressure, trading 0.85% lower near $4,530 during the European session [2]. The downward momentum is reinforced by technical factors, with spot prices below the 20-day EMA at $4,601.20 and the Relative Strength Index (RSI) indicating investor indecisiveness [2]. The price could slide further towards the March 26 low at $4,351.23 if it breaches the May 20 low at $4,453.72 [2]. The recovery in oil prices amid Middle East uncertainty has contributed to US inflationary pressures and diminished hopes for Federal Reserve rate cuts this year [2]. The CME FedWatch tool shows a 43.5% probability of the Fed holding rates steady, with the remainder expecting at least one hike in 2026 [2].
In Europe, ECB Chief Economist Philippe Lane expressed comfort with market expectations of higher interest rates, suggesting a possible rate hike in June or July, and noted that the bank expects indirect effects beyond energy prices [1]. Meanwhile, upcoming US economic data, including the May Consumer Confidence report and the Dallas Fed Manufacturing Business Survey, are in focus, but the main attention remains on Thursday’s Personal Consumption Expenditures (PCE) Price Index for further guidance on the Fed’s policy path [1].
According to [3], while some US officials, such as Marco Rubio, have downplayed the impact of the US attacks and President Trump has stated that peace talks are 'proceeding nicely,' the market remains cautious until a formal deal is announced. MUFG does not expect a rate hike this year and suggests that a credible peace deal could reopen the possibility of a rate cut, but until then, inflationary pressures and geopolitical risks will keep investors on edge [3].
CONCLUSION
The escalation in US-Iran tensions has heightened market uncertainty, supporting the US Dollar and pressuring both the Euro and Gold despite their traditional safe-haven roles. With central banks signaling a hawkish stance and inflationary pressures mounting, investors are likely to remain cautious until there is clear progress in peace negotiations. Key upcoming US economic data and the outcome of US-Iran talks will be crucial in determining the next market moves.