Markets Diverge After Iran Threatens Retaliation Over US Defensive Strikes

Market Wrap-up: Oil, Fed Expectations and Geopolitical Risks Drive MarketsMarkets traded with mixed sentiment amid renewed geopolitical escalation in the Middle East. Following the end of the US Memorial Day holiday, the US military conducted what it described as a defensive strike in southern Iran during Tuesday’s Asian session.

Iran accused Washington of violating the April ceasefire agreement and vowed retaliation, raising concerns that the fragile peace process, which President Trump had repeatedly hinted was approaching completion, may now face renewed disruption.

Brent crude surged 3% toward the $100/bbl handle, while WTI, still affected by the holiday thinned reopening, traded around 1.5% lower during Wednesday’s Asian session.

The geopolitical shock also pressured the US Dollar Index, which opened with a downside gap and slipped toward 99.10.

The softer USD supported most major currency pairs, particularly the New Zealand dollar after the Reserve Bank of New Zealand kept interest rates unchanged at 2.25% during the May 27 meeting, pushing NZD/USD roughly 0.5% higher.

However, USD weakness failed to provide meaningful support for gold prices as markets increasingly priced in the risk of renewed Fed tightening.

Disruptions to global energy supply chains have revived inflation concerns, leading a growing number of market participants to expect the Federal Reserve could resume rate hikes as early as July. This repricing intensified after new Fed Chair Kevin Warsh reiterated his commitment to preserving US dollar strength.

Meanwhile, UBS lowered its year end gold forecast by $400 to $5,500/oz, citing risks tied to a stronger USD and higher Treasury yields.

Looking ahead for today, beyond monitoring developments in the Middle East, markets will focus on ADP Weekly Employment Change, the Richmond Manufacturing Index, and further commentary from FOMC members.

Gold: Fed Rate Bets Pressure Bullion Despite Geopolitical Risks

Key takeaway:

Gold fell more than 1% on May 26 as markets increased bets that the Fed could raise interest rates again later this year.The renewed US airstrikes on Iran weakened hopes for a peace agreement, driving oil prices higher and reigniting inflation concerns.Markets are now closely watching Thursday’s US April PCE inflation data for further guidance on inflation pressures and the Fed’s next policy direction.

Technical Outlook:Daily Bias: Bearish.Support: 4,450  Resistance: 4,550

WTI: Oil Markets Remain Fragile Amid Iran Supply Concerns

Key takeaway:

WTI edged lower as traders continued to assess the possibility of renewed progress toward a US-Iran peace agreement.The latest escalation threatens to derail fragile diplomatic momentum after both sides had previously moved closer toward a memorandum of understanding.Although Iran condemned the recent US strikes in Hormozgan as a “serious violation” of the seven-week ceasefire, the oil market remains structurally supported by recurring geopolitical tensions and persistent uncertainty surrounding the strategic Strait of Hormuz.

Technical Outlook:Daily Bias: Bearish.Support: 88.65  Resistance: 97.24

DXY: Dollar Weakens as Markets Reprice Geopolitical Risks

Key takeaway:

The US Dollar Index traded slightly lower as markets evaluated the risk of renewed conflict escalation in Iran.Iranian Supreme Leader Mojtaba Khamenei stated that Gulf powers would no longer serve as protection for US military bases, while warning that the US would no longer have a safe haven in the region.Still, the hawkish repricing in Fed rate expectations, driven by rising oil prices and inflation concerns, could provide near-term support for the DXY.

Technical Outlook:Daily Bias: Bearish.Support: 98.85Resistance: 99.35

EUR/USD: Euro Holds Firm Despite Rising Middle East Tensions

Key takeaway:

The euro held relatively stable as rising US-Iran tensions reduced expectations that the European Central Bank would aggressively tighten policy further.Nevertheless, hawkish commentary from ECB officials continued to support the single currency.ECB policymaker Francois Villeroy de Galhau stated on Tuesday that the central bank “will do whatever is necessary” to keep inflation within target.According to the ECB Watch Tool, financial markets are currently pricing in nearly an 85% probability of a 25bps ECB rate hike at the June meeting.

Technical Outlook:Daily Bias: Bullish.Support: 1.16200  Resistance: 1.16619

USD/JPY: Yen Supported by Intervention Risks and Oil Shock Concerns

Key takeaway:

The Japanese yen strengthened modestly amid speculation that Japanese authorities could intervene again to support the currency.Finance Minister Satsuki Katayama stated that Japan stands ready to act against excessive FX volatility at any time.Meanwhile, Kazuo Ueda warned during Wednesday’s session that the current Middle East conflict represents Japan’s fifth major oil shock, adding that wage dynamics, inflation expectations, and exchange rate conditions will determine whether the impact proves temporary or prolonged.

Technical Outlook:Daily Bias: Bearish.Support: 158.83  Resistance: 159.50

Overall, markets are currently being driven primarily by geopolitical risks and the repricing of Fed rate expectations. The sharp rise in oil prices has reignited inflation concerns, reinforcing expectations that the Federal Reserve may maintain a hawkish stance for longer. This continues to pressure gold prices despite the recent weakness in the US dollar.

Capital flows remain highly fragmented across asset classes. FX markets are reacting aggressively to moves in the USD and Treasury yields, while equities and broader risk sentiment remain cautious amid fears of a wider escalation in the Middle East conflict.

The market’s next key focus will be US PCE inflation data and further commentary from FOMC officials to assess whether the current oil price shock is significant enough to alter the Fed’s policy trajectory.

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