Israel-Iran conflict escalates, Oil & Gold Rattled, All Eyes on Fed

The euro gained ground on Monday as markets showed resilience in the face of renewed Iranian missile attacks on Israel. Despite the intensifying conflict, investor sentiment improved slightly amid a perception that the hostilities are unlikely to escalate into a broader regional war.

The dollar came under pressure following weaker-than-expected US economic data. The Empire State Manufacturing Index dropped sharply in June, registering its lowest reading since March and reinforcing concerns over the pace of the US economic recovery. The disappointing figures contributed to a more dovish outlook for the Federal Reserve ahead of its monetary policy decision on June 18. Markets widely expect the Fed to keep interest rates unchanged, but the updated Summary of Economic Projections and Chair Jerome Powell’s remarks could shape expectations for the remainder of the year.

Geopolitical developments continued to dominate headlines, with Iranian state media reporting fresh missile strikes targeting Tel Aviv and Haifa. While the White House has urged Tehran to pursue de-escalation, there is little indication of immediate resolution.

In the Eurozone, European Central Bank officials struck a slightly hawkish tone. ECB Vice-President Luis de Guindos downplayed concerns over the euro’s recent appreciation, noting that the move has been orderly and not disruptive. He stated that markets have understood the ECB’s message that inflation risks are now balanced and that the risk of undershooting the inflation target is minimal.

Gold prices fell sharply on Monday even as geopolitical tensions in the Middle East remained elevated. The retreat in bullion comes as investors weigh shifting geopolitical signals against central bank policy expectations and macroeconomic data.

The sharp rally in gold that followed Friday’s escalation in the Israel-Iran conflict appears to have faded as markets responded to signs of potential de-escalation.

Despite the geopolitical backdrop, the primary focus for markets this week is monetary policy. The Federal Reserve is widely expected to keep rates unchanged at its June meeting, with traders looking to the updated Summary of Economic Projections and remarks from Chair Jerome Powell for guidance on the future rate path. Decisions from the Bank of Japan and the Bank of England are also due this week, further shaping sentiment across global markets.

In the days ahead, US data releases will include May’s retail sales, housing figures, and regional business activity surveys. These reports could influence both the Fed’s policy outlook and broader risk sentiment, indirectly impacting demand for safe-haven assets like gold.

Despite Monday’s pullback, the outlook for gold remains broadly constructive. Persistent geopolitical risks, including unresolved tensions in Eastern Europe and ongoing instability in the Middle East, continue to underpin demand for the yellow metal.

Oil prices dropped on Monday in a volatile session, as signs emerged that Iran may be seeking to de-escalate tensions with Israel. The potential for a diplomatic breakthrough tempered fears of a wider regional conflict that could threaten global energy supplies.

According to sources cited by Reuters, Iran has asked Qatar, Saudi Arabia, and Oman to urge U.S. President Donald Trump to pressure Israel into agreeing to a ceasefire, in exchange for Tehran’s renewed flexibility on nuclear negotiations.

These developments led traders to scale back bets on a prolonged conflict that could spill over into neighboring countries and disrupt energy infrastructure.

Despite the back-and-forth military strikes between Israel and Iran, key oil infrastructure has so far been spared.

Iran, a key member of the Organization of the Petroleum Exporting Countries (OPEC), currently produces about 3.3 million barrels per day and exports over 2 million barrels daily. Analysts suggest that the spare production capacity held by other OPEC+ members could, in theory, offset an Iranian supply shock if needed. However, any real disruption could still cause significant short-term volatility, especially if escalation occurs near critical infrastructure.

As the situation develops, market attention will remain focused on diplomatic efforts and potential military responses. With global supply-demand balances already tight, even small shocks in the region could ripple through global oil markets.

U.S. equities advanced sharply on Monday, lifted by investor optimism over a potential easing of tensions in the Middle East and ahead of a pivotal week for monetary policy.

Investor sentiment improved as markets weighed conflicting reports about Iran’s willingness to de-escalate its ongoing conflict with Israel. Earlier in the session, Reuters and The Wall Street Journal cited unnamed sources claiming that Tehran had approached Qatar, Saudi Arabia, and Oman to mediate a ceasefire, encouraging U.S. President Donald Trump to exert influence over Israel. However, Iranian officials later denied the reports, insisting no formal outreach had been made.

Attention now turns to the Federal Reserve, which begins its two-day policy meeting today. The central bank is widely expected to hold interest rates steady at around 4.5%, but market participants will be closely scrutinizing the Fed’s updated economic projections and the tone of Chair Jerome Powell’s post-meeting press conference on Wednesday.

In corporate news, Roku shares surged after the company announced an exclusive partnership with Amazon Ads, creating what both firms called the largest authenticated connected TV (CTV) footprint in the United States. The deal is expected to enhance ad targeting and reach streaming audiences.

As markets digest geopolitical developments and look ahead to the Fed’s decision, volatility is expected to remain elevated. Investors are likely to tread cautiously, weighing policy signals against a backdrop of global uncertainty.