Mideast Turmoil Shakes Global Markets, UK Interest Rate Decision

The EUR/USD pair traded virtually flat on Wednesday ending the session with minor losses. The move followed the Federal Reserve's decision to leave interest rates unchanged, even as geopolitical tensions in the Middle East continued to escalate. Comments from U.S. President Donald Trump and cautious optimism from the Fed gave a modest boost to the U.S. Dollar, effectively capping the Euro’s earlier gains.

The Federal Open Market Committee (FOMC) held its target range steady at 4.25%–4.50%, reaffirming that the U.S. economy is expanding at a solid pace, supported by a resilient labor market.

Fed Chair Jerome Powell emphasized a wait-and-see approach, stating that while inflation has moderated, the labor market remains strong. “As long as we have the kind of labor market we have and inflation is coming down, the right thing to do is hold rates,” Powell said. He also warned that the impact of tariffs and external risks like geopolitical developments could influence future policy decisions.

In line with Powell’s remarks, the Fed’s latest economic projections signal two potential rate cuts by year-end, a dovish shift that has helped shape expectations across currency and bond markets.

Initial Jobless Claims came in at 245,000 for the week ending June 14, in line with expectations. Continuing Claims dropped by 6,000 to 1.945 million. However, signs of softness appeared in the housing sector: May Housing Starts declined by 9.8% month-over-month to 1.256 million units, while Building Permits fell by 2% to an annualized pace of 1.393 million.

On the inflation front, the Eurozone’s Harmonized Index of Consumer Prices (HICP) rose by 1.9% YoY in May, down from April’s 2.2%. Core HICP, which strips out volatile items, eased to 2.3% YoY from 2.7%. The moderation reinforces the European Central Bank’s (ECB) view that inflation is broadly in line with its target, though growth concerns linger.

Gold remained under pressure in early Thursday trading, failing to sustain a modest intraday rebound and hovering well below the key $3,400 psychological level during the Asian session. The metal is weighed down by renewed strength in the U.S. Dollar (USD), following the Federal Reserve’s decision to hold interest rates steady while signaling a slower-than-expected pace of future cuts.

The Fed’s hawkish tone has reinforced expectations that policymakers will remain cautious, with the updated dot plot showing just two projected rate cuts by the end of 2025.

Despite this, broader market risk sentiment remains fragile due to escalating geopolitical tensions and trade policy uncertainty, helping gold retain support above its weekly low set on Wednesday. The continuing conflict between Israel and Iran, now entering its seventh day, has intensified fears of a broader regional war. The Israel Defense Forces (IDF) reportedly warned civilians in the Iranian cities of Arak and Khondab to evacuate, citing ongoing military operations against Iranian infrastructure.

President Donald Trump convened a Situation Room meeting on Wednesday to discuss possible U.S. responses, with media reports indicating that military strike options have been approved, though Trump is said to be cautious about entering a prolonged conflict.

Oil prices retreated slightly early on Thursday amid volatile trading, as speculation over possible U.S. involvement in the escalating Israel-Iran conflict added uncertainty to the market. At the same time, a stronger U.S. Dollar (USD) posed resistance to further gains, cooling the rally that had lifted crude to multi-month highs earlier this week.

According to Bloomberg, U.S. defense and intelligence agencies are actively assessing options for military action, though no clear decision has been made, and the timing remains uncertain. The report heightened market anxiety over a possible direct escalation of the Middle East conflict, which would significantly increase risks to global oil supplies.

President Donald Trump maintained a hardline stance toward Tehran throughout the week, demanding Iran’s unconditional surrender, but stopped short of confirming whether the U.S. would enter the conflict militarily. He also left the door open to nuclear negotiations, adding a layer of ambiguity to an already volatile geopolitical environment.

Meanwhile, Israel and Iran continued exchanging attacks on Thursday, marking the seventh consecutive day of conflict, further stoking fears of potential disruptions to oil production and transport across the region.

Despite near-term headwinds, analysts expect U.S. fuel demand to strengthen in the coming months, supported by seasonal travel and summer driving activity. This could provide some underlying support for crude, even as macro and geopolitical uncertainties continue to shape trading sentiment.

Oil markets remain highly sensitive to developments in the Middle East, with any confirmation of U.S. military engagement likely to trigger sharp price swings. At the same time, stronger dollar dynamics and mixed U.S. economic data are complicating the near-term trajectory for crude.

U.S. equities finished mixed on Wednesday, with the US 500 giving up earlier gains to close marginally lower after the Federal Reserve held interest rates steady but signaled a more cautious approach to monetary easing. Persistent uncertainty surrounding President Donald Trump’s tariff policies and geopolitical risks in the Middle East also weighed on sentiment.

As widely expected, the Fed kept its benchmark interest rate within the 4.25%–4.50% range. However, the central bank struck a more hawkish tone, trimming its rate cut projections for the coming years amid concerns over elevated inflation and slowing economic momentum.

Economic data offered a mixed picture. Single-family housing starts ticked up 0.4% in May, but a sharp drop in building permits pointed to a cooling real estate market, challenged by high construction costs and inventory overhang. Meanwhile, jobless claims dipped by 5,000 to 245,000, though they remain elevated—suggesting a potential slowdown in labor market momentum heading into summer.

U.S. financial markets will be closed on Thursday, June 19, 2025, in observance of Juneteenth National Independence Day, a federal holiday commemorating the end of slavery in the United States.