Global Tensions & G7 Weigh on Markets, Oil Surges, Fed Interest Rates Ahead

The EUR/USD pair is facing renewed downward pressure early on Monday as escalating geopolitical tensions in the Middle East fuel risk aversion, prompting investors to flock to the US Dollar (USD). The pair ended the session on Friday with 0.51% losses driven by growing safe-haven demand.

Over the weekend, Israel launched fresh attacks targeting Iranian nuclear facilities and missile production sites. In retaliation, Iran responded late Sunday with strikes on Israeli territory, including an explosion reported in the coastal city of Haifa.

Iranian state media, including Mehr News, confirmed that the country has initiated the fourth phase of its military response, with officials vowing firm retaliation against any further “adventurism” by Israel. The heightened hostilities have rattled global markets, bolstering the USD’s appeal as a safe-haven asset.

Meanwhile, economic data from the United States offered additional support to the dollar. The University of Michigan’s preliminary Consumer Sentiment Index rose sharply to 60.5 in June, up from 52.2 in May and well above expectations of 53.5, signaling increased consumer optimism.

Looking ahead, the US Federal Reserve is widely expected to keep interest rates steady within the 4.25%–4.50% range at its policy meeting on Wednesday.

Gold prices surged to a five-week high on Friday as escalating geopolitical tensions and softening U.S. inflation data fueled demand for safe-haven assets.

The rally was driven primarily by intensifying conflict in the Middle East. Israel launched strikes against Iranian military targets, nuclear facilities, and senior officials on Friday, stoking fears of a broader regional war. The heightened risk environment sent investors fleeing to safe havens like gold, which saw a sharp uptick in demand.

In the U.S., recent inflation prints have provided some relief to markets.

Financial markets are now closely watching the upcoming Federal Reserve policy meeting scheduled for Wednesday. The central bank is expected to leave interest rates unchanged, but updated economic projections could influence the outlook for rate cuts.

Yields on U.S. Treasuries edged higher, with the 10-year yield climbing more than seven basis points to 4.436%, and real yields following suit. This rise in yields has slightly capped further gains in bullion, but has not reversed the overall uptrend driven by geopolitical risk and monetary policy expectations.

Looking ahead, traders will be monitoring a busy U.S. economic calendar that includes retail sales, industrial production, housing data, and jobless claims—all of which could influence near-term gold price dynamics alongside geopolitical developments.

Oil prices advanced in Asian trading on Monday, extending last week’s rally as heightened geopolitical tensions in the Middle East stoked concerns over potential supply disruptions. However, gains remained capped below Friday’s 4½-month highs, as traders assessed the broader impact of the Israel-Iran conflict.

The surge in prices followed a dramatic escalation over the weekend. Israel launched a targeted strike on Iran’s military infrastructure, including nuclear sites, on Friday. In response, Tehran retaliated with missile attacks on Israeli cities, including Tel Aviv. The intensifying hostilities have prompted fears of a broader regional conflict, with markets closely monitoring the potential for U.S. involvement.

Strategic supply risks have become a key concern, particularly around the Strait of Hormuz—a critical maritime chokepoint for oil exports from the Gulf to Asia and Europe. Any disruption in this corridor could have significant ramifications for global energy markets.

The conflict has also raised the possibility of renewed U.S. sanctions or restrictions on Iranian oil exports, further tightening an already delicate supply-demand balance.

President Donald Trump, commenting on the developments, acknowledged that while diplomatic efforts are underway, Israel and Iran “may have to fight it out” before a ceasefire can be reached. He also warned Iran against targeting U.S. facilities in the region. Notably, the flare-up led Iran to cancel scheduled nuclear talks with the U.S. over the weekend, adding to the geopolitical uncertainty.

While geopolitical risk remains the dominant driver for oil prices in the near term, traders are also bracing for a series of major central bank decisions this week that could influence broader risk sentiment and demand expectations.

U.S. equities ended sharply lower on Friday as geopolitical tensions in the Middle East surged following Iran’s retaliation against Israel. Fears of a broader regional conflict drove oil prices higher and raised concerns about global growth and inflationary risks.

Meanwhile, the White House reiterated it would consider military options should negotiations collapse, with a key decision point expected by Thursday. Iran responded by sending more than 100 drones toward Israel, prompting a nationwide state of emergency and raising the threat of direct confrontation.

Energy stocks outperformed amid the surge in crude prices, defense stocks also rallied as investors priced in expectations for increased military spending.

On the macroeconomic front, the University of Michigan’s preliminary June consumer sentiment index rebounded to 60.5 from 52.2 in May. Survey director Joanne Hsu noted that consumers appeared to have adjusted to recent policy uncertainty and tariff announcements.

This improved sentiment followed inflation data earlier in the week that showed price pressures easing. The May Producer Price Index (PPI) came in below expectations, echoing a similarly soft Consumer Price Index (CPI) report. However, concerns persist that the full inflationary impact of newly announced U.S. tariffs has yet to be realized.