Trade war worries have largely given way this week to fears over a physical war. With Israel and Iran exchanging missile attacks on each other, the market is still trying to gauge the likelihood of this being contained to a regional conflict, or whether it could bring in other players which could see the war broaden. The quite restrained market reaction (apart from oil) so far suggests that traders are positioning for this to be a contained war between Israel and Iran, with limited involvement from the US. But like with any conflict, there are many moving parts, and market sentiment continues to go back-and-forth between risk-on and risk-off depending upon what the latest headlines point to, with both a ceasefire and further escalation remaining possible scenarios.
Energy market prices have offered perhaps the best window to see what is going on in the conflict, with the oil price reflecting points of escalation and de-escalation. Oil has had an 18% trading range over the past week (in the case of US crude), with the surge higher based on supply concerns for global oil supply should energy infrastructure continue to be targeted. Iran is a significant player in the global oil market, who counts China as its biggest energy customer, so the crude price will remain highly tuned to any news concerning the country’s energy infrastructure. And even more so on any developments regarding shipping in the Strait of Hormuz (through which 20-30% of the global oil supply is shipped).
Oil prices are more headline-driven than technically driven right now. But levels to watch for US crude include support at $71.25 and $68.30, while resistance at $75.30 would need to be cleared to open further upside.
Elsewhere, the USD has caught a bid on safe haven flows and oil demand. Increased activity in the oil market has suited the USD’s ‘petrodollar’ status. Towards the tail end of last week, the DXY (Dollar Index) was looking sluggish around the 97.65 level, before finding its feet and making a run back to 98.80 (as of early Asian market trading hours on Wednesday).
This return to form of the Dollar has somewhat stymied gold’s gains despite the ongoing conflict in the Middle East. Gold made a run to $3450 when the conflict first escalated (on Friday last week) but has since settled down due in part to headwinds created by the appreciating USD. At the time of writing, gold is trading at $3387, ahead of minor support at $3372 and $3353, with firmer support sitting at $3315. On the topside, resistance at $3430 and $3460 await. For gold to resume its move higher, a downturn in the USD or an uptick in risk aversion may be required to bring the $3450 level back into the immediate picture.
Looking ahead, while the Israel-Iran conflict is the key driver of sentiment right now, the FOMC meeting will be closely watched (Wednesday US time). While no interest rate change is expected this week, investors will be looking for clues from the Fed as to when the next rate cut may arrive, as well as getting Jerome Powell’s (the Fed Chairman) assessment of the US economy in light of continued tariff uncertainty.
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