Geopolitical wildcard just went live – Oil is the tell

Israel striking nuclear targets in Iran may read like a geopolitical flashpoint, but for the bond market, it just tossed more dry powder onto an already smouldering rally. After a week of soft inflation prints, a solid PPI, and another gangbuster 30-year auction (tailing 1.5bps through), Treasuries were already drifting higher—now they’ve got jet fuel. The long end is stretching its legs, and traders are happy to lean long into weekend headline risk.

Tactically, the bid in bonds makes sense. You don’t ignore the setup: cooler price pressures, solid demand at auction, and a market that’s front-running a Fed recalibration while Powell stays glued to his “good place” script. That said, the backdrop is still structurally bearish—debt, deficits, and looming tariffs haven’t disappeared. This is a bull run wrapped in a bear costume.

And here’s the catch—enjoy the bond bid while it lasts, because the tariff clock is ticking. If we see U.S. CPI heading north of 4% post-implementation, this entire bond bid gets smoked. The real macro unknown is whether the tariff shock lands like a sledgehammer or just a dull thud. There’s plenty of leakage—Chinese goods rerouted, inventory buffering, retail swallowing margin. If the VAT-style hit nets out closer to 10–15%, the curve may still steepen, but not in a panic.

Still, the Middle East geopolitical premium is underpriced. Israel going live on Iranian nuclear targets isn’t a sideshow—it’s a flashing red escalation risk. So far, the market is treating it as a controlled burn: oil popped, then faded. Crude’s telling you traders are watching Hormuz like a hawk. No shipping disruption, no real moonshot rerating — yet. But if that Strait gets blocked, or if Tehran overplays its hand and proxies hit US targets, $75 Brent becomes the new floor, not the ceiling.

Higher oil prices create an awkward mix for energy-import-dependent Asian economies, such as Japan, Korea, and, more critically, China. If Iran’s shadow fleet starts running dry, China’s cheap crude supply chain gets crimped. That’s not just a growth hit—it’s a stagflationary overlay on an already fragile inflation on the mainland.

In FX, the knee-jerk was textbook. The franc, yen, and dollar all caught a safe-haven bid, while carry currencies—ZAR, MXN, HUF—got kicked in the teeth. Aussie and Kiwi took the brunt in G10, repricing sharply lower as oil-shock fears and global supply chain risk crept in. Classic risk-off flows returned just as volatility was starting to collapse. This is your new weekend hedge.

But let’s be clear: if this headline offers the dollar bulls a lifeline, it’s likely a short one. The underlying narrative hasn’t changed. The greenback was already on a downward trend before bombs dropped —DXY nearly 10% lower YTD, with rates traders doubling down on Fed cuts as disinflation trends persist and the labour market begins to fray. Safe-haven appeal is harder to sell when front-end yields are waning, and asset rotation is shifting away from U.S. paper. 

This is not a drill. The next 48 to 72 hours are critical. Bonds are rallying in anticipation. Gold and oil on the dip should be used as hedges against the unthinkable. Stocks are stuck in a defensive crouch. If this escalates into a U.S.–Iran proxy tit-for-tat, the market reaction will become exponentially more violent. And if Hormuz goes offline? Game over—global macro gets re-priced in real-time.

The setup is clean, but the tail risk is anything but.

For Reversion Traders: It’s All About Oil Prices

Geopolitical risk just punched its way back into the global narrative—and the dollar is finally responding. The Israeli strike on Iranian nuclear infrastructure isn't your average tit-for-tat. This is a deliberate escalation, and FX is reacting through the oldest channel in the book: crude oil. Brent’s near-vertical rally—up 8% and counting—has put a floor under the oversold greenback and sparked a textbook bid across safe havens.

DXY is up around 0.75% from overnight lows, but the move feels restrained considering the scope of the risk event. In a different volatility regime, this kind of geopolitical shock paired with equity and bond selloffs would have triggered a much sharper dollar surge. But today, cross-asset fragility is capping the move. With S&P futures down over 1.5%, the broader USD rally is hitting resistance from risk-off rotations elsewhere.

The escalation matters because of its specificity: Israel reportedly hit nuclear targets. That changes the geopolitical calculus. Now, markets are watching for signs of Iranian retaliation and, more crucially, any disruption to the Strait of Hormuz. If shipping lanes tighten, and global energy supply gets caught in the crossfire, oil won’t just rally—it will reprice.

That risk, layered on top of U.S. tariff-driven inflation, gives the Fed another reason to hold the line. What looked like a soft CPI-driven excuse to cut is now being challenged by a rising inflation risk premium. Powell doesn’t have to pivot anymore—he can just wait. For USD, that’s a green light for tactical upside.

Today’s University of Michigan sentiment data will feed into this narrative. If inflation expectations edge higher in line with fuel price concerns, the soft dollar thesis from earlier this week starts to crack. Short positioning is exposed, and the dollar is staging a quiet squeeze.

Meanwhile, the euro is losing altitude. EUR/USD is backing off from overstretched levels flagged by short-term valuation models. Higher energy prices hit Europe harder and faster—and the euro isn’t built for that. If oil prices rise again (Brent +$ 75) , the EUR/USD is likely to trade heavier, with 1.14–1.15 as the near-term anchor zone.

The yen and franc are acting as expected—classic risk-off flows. But that strength has limits. Japan’s energy import burden is growing again, and if oil holds above $70 JPY could find itself struggling to extend gains beyond the initial safe-haven bid.

All eyes now shift to the weekend. More Israeli strikes are expected. Iranian retaliation is already underway. Markets are trading on anticipation—but confirmation risk is high. If this turns into a true multi-front conflict, or U.S. assets are targeted, expect FX volatility to explode. Until then, the dollar stays supported, oil stays firm, and risk stays on edge.