Iran-Israel tensions threaten central bank easing cycles as Oil prices surge

Israel’s attack on Iranian nuclear sites and military targets has triggered a clear risk off mode in financial markets so far today, with investors responding to the news by flocking into the safe-havens, as is customary during times of rising geopolitical tensions.

The US dollar has been the clear winner, recovering around half of its week-to-date losses, with the yen and the Swiss franc also outperforming.

The other major implication for markets is the impact of the attack on global oil prices, which soared by more than 10% at one stage overnight.

Thus far, at least, Israel has not directly targeted Iran’s oil supply, which appears to be unaffected. The big fear for investors is that an escalation to the tensions will not only raise the risk of a prolonged conflict, but it could disrupt Iranian oil production.

We suspect that safe-haven assets will be well supported in the coming days, as markets brace for additional retaliatory attacks and the possibility of a wider conflict.

The spike in oil prices also has broader implications, as it could both weigh on the global growth outlook and keep inflationary pressures higher for longer, which complicates the easing cycle among the world’s major central banks.