The global market reaction to the escalating conflict in the Middle East remains remarkably fragmented. U.S. equities successfully staged a “buy-the-dip” recovery overnight after an initial selloff. Both S&P 500 and NASDAQ closed with modest gains. In contrast, Asian markets told a darker story. South Korea’s Kospi tumbled nearly -5% as it caught up with the weekend’s escalations, while Japan’s Nikkei 225 shed over -2%. Meanwhile, Hong Kong and China are relatively steady.
The “fear premium” in commodities is showing some signs of exhaustion. Gold briefly breached 5,400 mark but has since lost momentum, with upside resistance capped well below 5,600 record high. Similarly, WTI Crude Oil is gyrating in a tight range (71–73) below yesterday’s spike high, as traders weigh the potential for a Strait of Hormuz closure against current supply buffers and OPEC+ capacity.
Market pricing so far implies investors are leaning toward limited conflict scenario. Three broad paths are being weighed.
- Surgical (1–3 Weeks): A “best-case” scenario — lasting one to three weeks — would involve collapse of Iranian command structure or rapid ceasefire under interim leadership.
- Regime Transition (Up to 2 Months): A prolonged neutralization of “pockets of resistance” and dismantling of nuclear/missile infrastructure. This would sustain volatility but avoid systemic collapse.
- Forever War (1+ Years): Most destabilizing is a descent into a multi-sided civil war, shifting from high-intensity air strikes to long-term regional instability, which would materially alter risk premia across energy, currencies and sovereign markets.
Current cross-asset behavior suggests markets are assigning low probability to “Forever War” scenario. Equity resilience and contained oil pricing indicate belief that escalation will be bounded rather than indefinite.
Central banks are also already evaluating implications. ECB Chief Economist Philip Lane warned today that prolonged conflict could both spike inflation and depress Eurozone output — a classic stagflation risk. Though, he signaled little appetite for tolerating higher inflation under such uncertainty. In Australia, RBA Governor Michele Bullock echoed inflation concerns, explicitly keeping rate hike on table this month due to oil shock risk.
In currency markets, Dollar remains undisputed safe-haven leader this week. Canadian Dollar follows, buoyed by oil support. Aussie ranks third after hawkish RBA rhetoric. Swiss Franc is weakest after intervention warnings from SNB Euro underperforms as traders front-run Europe’s structural exposure, while Kiwi lags and Sterling and Yen hold middle ground.
In Asia, at the time of writing, Nikkei is down -3.18%. Hong Kong HSI is down -1.00%. China Shanghai SSE is down -1.06%. Singapore Strait Times is up 0.86%. Japan 10-year JGB yield is up 0.061 at 2.125. Overnight, DOW fell -0.15%. S&P 500 rose 0.04%. NASDAQ rose 0.36%. 10-year yield jumped 0.086 to 4.048.
RBA’s Bullock reopens door to March hike as oil risks mount
RBA Governor Michele Bullock delivered a distinctly hawkish message at the AFR Business Summit today, warning markets not to assume a March rate hold is a done deal. She stressed that the upcoming meeting is “live,” pushing back against expectations that policy decisions are effectively pre-set or limited to quarterly moves.
Bullock highlighted that inflation remains elevated at 3.8% while unemployment at 4.1% still reflects tight labor market conditions. The Board, she said, will be “actively looking” at whether it needs to “move more quickly”, explicitly discouraging the view that the RBA only adjusts rates at predictable intervals.
Central to her remarks was the risk of a prolonged oil price spike stemming from escalating Middle East tensions. While she emphasized that it is too early to quantify the impact, Bullock warned that a supply-driven shock could add to inflation pressures and, critically, influence inflation expectations — a development the RBA is “very alert to.”
AUD/JPY breaks high after hawkish RBA shift, 113.22 next
Australian Dollar rallied broadly after RBA Governor Michele Bullock delivered hawkish remarks that reintroduced a genuine possibility of a rate hike at the March meeting. By describing the decision as “live” and warning against assuming a hold, Bullock unsettled prior market consensus and injected fresh upside risk into rate expectations. The shift immediately translated into stronger AUD performance across the board.
AUD/JPY led the advance, extending its uptrend and breached 112 level. The move reflects not only renewed tightening speculation from the RBA, but also relatively softer Yen dynamics amid delayed tightening expectations from Tokyo.
Technically, as long as 110.03 support holds, near-term bias remains firmly to the upside. The next target lies at 38.2% projection of 96.24 to 107.67 from 110.78 at 113.22, which aligns closely with the upper boundary of the near term rising channel. That area could present initial resistance and cap gains on first test, particularly if momentum indicators begin to stretch.
However, decisive break above 113.22 would open the path toward 61.8% projection at 116.65 before topping around there. That level represents a much more formidable barrier, coinciding almost precisely with the long-term fibonacci level, 61.8% projection of 59.85 (2020 low) to 109.36 (2024 high) from 86.03 (2025 low) at 116.62.
Euro under siege as Middle East war exposes fragility, EUR/CAD to dive to 1.57
While the military theater of the US-Israel-Iran conflict is centered in the Persian Gulf, its economic epicenter is arguably the Eurozone. The sharp decline in Euro this week is not merely a broad flight into Dollar safety. It reflects targeted repricing of Europe’s structural vulnerabilities at a moment of acute energy risk. Euro has emerged as primary casualty among major currencies, underperforming nearly all peers except Swiss Franc, which relative weakness is largely policy-driven following intervention warning from the SNB
The Energy Storage “Time Bomb”
The timing could hardly be worse. The EU enters March refill season with gas storage around 30%, significantly below roughly 40% seen in 2025 and 60% in 2024. That cushion has evaporated just as maritime energy routes face disruption risk.
With Strait of Hormuz under threat and major shippers such as Maersk and Hapag-Lloyd bypassing Suez Canal, replenishing inventories will come at steep premium. This looming import bill shock acts as direct devaluation pressure on Euro through deteriorating trade balance.
The Stability Proxy
Besides, Euro is treated as a proxy for Eurasian stability. Tehran’s declaration of “Total War” elevates non-financial risks that disproportionately affect Europe. The region’s economic architecture is deeply intertwined with Middle East energy and Asian trade corridors.
Closure or prolonged disruption of Suez Canal forces rerouting around Cape of Good Hope, effectively taxing every Euro-denominated export. Longer shipping times translate into higher freight costs, inventory bottlenecks and margin compression for European manufacturers.
At the sovereign level, rising energy costs and regional instability could renew fiscal strain. Migration pressures and potential need for renewed energy subsidies risk widening deficits.
Monetary Policy “Trapping”
The ECB now finds itself edging toward stagflationary dilemma. Surging natural gas prices are inflationary, yet function as regressive tax on consumers and businesses. Growth erosion could force policymakers to prioritize stability over price control. Markets might start to price in scenario where the ECB is compelled to shift its stance, and even pivoting toward easing again even as inflation risks jump.
The Failure of the 1.2000
Failure to break 1.2000 in EUR/USD now looks pivotal. Throughout 2025, Euro rallied from 1.03 toward 1.20 on hopes of industrial revival. That psychological ceiling proved insurmountable. The weekend escalation is starting to trigger capitulation among long-position holders. What had been narrative of recovery is morphing into unwind of crowded positioning.
EUR/CAD to target 1.57
EUR/CAD is among the bigger movers this week, with Loonie being lifted by surging oil prices. Technically, fall from 1.6465 medium term top resumed by powering through 1.6063 support. Near term outlook will stay bearish as long as 1.6170 resistance holds.
For now, the fall from 1.6465 is seen as a correction to the five-wave rally from 1.4483. Deeper decline should be seen to 38.2% retracement of 1.4483 to 1.6465 at 1.5708. But strong support should be seen there to contain downside to bring rebound.
GBP/USD Daily Outlook
Daily Pivots: (S1) 1.3329; (P) 1.3393; (R1) 1.3470; More…
Intraday bias in GBP/USD stays on the downside as fall from 1.3867 is still in progress. Decisive break of 1.3342 structural support will argue that it’s already correcting the whole rise from 1.2099. In this case, deeper fall should be seen to 1.3008 support next. For now, risk will stay on the downside as long as 1.3574 resistance holds, in case of recovery.
In the bigger picture, as long as 1.3008 support holds, rise from 1.3051 (2022 low) should still be in progress for 1.4284 key resistance (2021 high). Decisive break there will add to the case of long term bullish trend reversal. However, firm break of 1.3008 will raise the chance of medium term bearish reversal and target 1.2099 support next.
