Escalating tensions between the United States and Iran have triggered significant market movements and heightened caution among investors ahead of the US May Consumer Price Index (CPI) release. The US launched retaliatory strikes against Iran on Tuesday, targeting air defense, ground control stations, and surveillance radar sites near the Strait of Hormuz after the shooting down of a US helicopter gunship, with President Donald Trump vowing retaliation for the incident [1][2]. In response, Iran fired missiles at US airbases in Jordan, Kuwait, and Bahrain, and warned the US to leave the Gulf region for their own safety, with Foreign Minister Abbas Araghchi stating, “Powerful armed forces will not ignore any attack or threat” [2].
The British Pound (GBP) traded positively around 1.3390 against the US Dollar (USD) during early European hours on Wednesday, but analysts noted that renewed Middle East tensions could limit further upside for the GBP as riskier assets come under pressure [1]. Meanwhile, the Indian Rupee (INR) opened almost flat against the USD, consolidating around 95.42, but the outlook turned bullish for USD/INR due to the support for oil prices from the geopolitical conflict. The MCX Crude Oil contract expiring June 18 rose 0.8% to near 8,490, clawing back half of Tuesday's early losses after sliding to 8,212 [2]. Higher oil prices tend to negatively impact currencies of economies reliant on oil imports, such as India [2].
Foreign Institutional Investors (FIIs) have remained net sellers in the Indian stock market throughout June, offloading stakes worth Rs. 60,529.36 crore, as Middle East tensions dampen sentiment towards risky assets [2]. Both markets are awaiting the US CPI data, which will be published at 12:30 GMT. The US Bureau of Labor Statistics is expected to report headline CPI growth at an annualized pace of 4.2%, up from 3.8% in April, and core CPI at 2.9%, up from 2.8% [2]. Signs of accelerating price pressures could prompt expectations of further Federal Reserve interest rate hikes, with the CME FedWatch tool indicating a 72% probability of at least one hike this year [2].
In the UK, financial markets had previously expected the Bank of England (BoE) to cut interest rates twice this year to 3.25%, but since the US-Iran conflict began, projections have shifted to a potential 25 basis point rise before December, according to CNBC [1]. The monthly UK Gross Domestic Product data and India's CPI data, both due Friday, are also in focus, with India's CPI expected to rise to 4% YoY from 3.48% in April [2].
CONCLUSION
Heightened US-Iran tensions have led to increased volatility in currency and oil markets, with risk assets under pressure and investors awaiting key US CPI data for further direction. The possibility of higher inflation and interest rate hikes in the US, along with shifting expectations for UK and Indian monetary policy, suggest continued uncertainty and elevated market impact in the near term.