Global financial markets have entered a phase of heightened volatility following escalating tensions between Israel and Iran, with investors responding to growing geopolitical risks by shifting capital into oil, gold, and the U.S. dollar. The conflict, triggered by Israel's recent airstrikes on Iranian nuclear and missile facilities, has drawn retaliation from Iran and renewed fears of a broader regional war.
Iran has suspended nuclear negotiations and threatened to disrupt maritime traffic in the Strait of Hormuz—a key oil transit route that handles nearly 25% of global crude shipments. The situation has led to widespread concern among oil traders and energy companies. The CEO of Shell warned that any disruption in the Strait would have a major impact on global trade.
In response to the mounting crisis, U.S. President Donald Trump has given a two-week window to evaluate the need for potential military intervention. This pause has temporarily calmed markets but has not eliminated the underlying uncertainty.
Brent crude and WTI prices surged between 7% to 11%, touching five-month highs near \$79 per barrel. Analysts note that a risk premium of \$8 to \$10 per barrel has already been built into prices. Should the conflict escalate further or the Strait of Hormuz be blocked, oil prices could potentially reach \$100 or more, with some extreme forecasts projecting levels up to \$130–\$150 per barrel.
Gold prices have also soared as investors seek safety, with the precious metal approaching record highs. The U.S. dollar has gained strength against major currencies, while U.S. Treasury yields fell as traders moved into bonds.
In equity markets, the reaction has been mixed. U.S. indices initially slumped on geopolitical concerns, with the Dow falling over 300 points and the S&P 500 and Nasdaq also posting losses. However, brief rebounds followed after hopes emerged that Iran might pursue a diplomatic resolution. Futures trading remained choppy, reflecting the ongoing uncertainty.
Asian and European markets experienced similar fluctuations. Asian stocks dipped but later recovered slightly. In Europe, the EuroStoxx 50 and FTSE showed minor gains as crude prices stabilized. Emerging markets have been more vulnerable. The Indian rupee, which fell to around 86.60 against the U.S. dollar, reflected concerns about rising import costs. Nonetheless, inflows from major IPOs helped to cushion the currency’s decline.
The broader implications for global central banks are significant. Sustained high oil prices could stoke inflation, potentially complicating monetary policy decisions for the U.S. Federal Reserve and the Reserve Bank of India. Expectations of interest rate cuts may be delayed if energy-driven inflation persists.
Investors are now closely monitoring developments on multiple fronts. Key factors include the decision from Washington on military action, stability in the Strait of Hormuz, and how oil and commodity markets respond in the coming weeks. Haven assets like gold and the U.S. dollar are expected to remain in demand, while equity markets may continue to see increased volatility as geopolitical tensions evolve.
The coming weeks will be critical in determining whether diplomacy prevails or if markets must brace for further disruption in global energy supplies and economic stability.