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The currency market has been thrown into disarray after Israel launched a wave of coordinated airstrikes on Iran’s nuclear and ballistic missile infrastructure a move that marks the most dangerous escalation in the region in years. Within minutes, Brent crude spiked over 11% before partially retracing, and traders rushed out of risk assets and into havens.
WTI H1 Chart
The surge in oil reversed all its losses since April when Trump’s new tariffs were first announced, snapping back above $74 before settling near $71. Meanwhile, the Swiss franc, yen, and US dollar were the prime beneficiaries of the classic risk-off play. High-beta FX like the AUD, NZD, ZAR, and MXN were punished, particularly as carry trades unwound aggressively heading into a very uncertain weekend.
From a geopolitical standpoint, things are still unfolding quickly. Netanyahu has promised continued strikes "as long as necessary," while Iran has already retaliated with over 100 drones and is promising much more. The situation has the potential to deteriorate into a wider regional conflict, and with Iranian nuclear enrichment back in the spotlight and nuclear deal talks already looking shaky this isn’t going to de-escalate quietly.
For the USD (DXY), the timing couldn’t be more interesting. Just before the missiles flew, the greenback was plumbing new year-to-date lows, driven by weak US CPI and PPI data, softening labour market prints, and growing calls for the Fed to cut. But geopolitical risk trumps everything in the short term. Now, the dollar is back in demand, even as macro headwinds remain.
DXY H1 Chart
President Trump has doubled down on his pressure campaign against the Fed, calling for a two-percentage-point rate cut (up from his previous demand of one). His argument? Lower rates would ease US debt burdens by $600 billion annually. The real pressure point, however, is political: the Fed now faces a credibility test if Trump names a new chair nominee ahead of Powell's 2026 exit, as markets will have to gauge not just policy, but politics.
Trump Tweet
On that front, rate cuts still look unlikely in the very near term. While inflation is softening core PCE likely rose just 0.1% in May policymakers remain cautious due to trade uncertainty and rising energy costs. Labor market data is sending mixed signals: continuing jobless claims are now at their highest since November 2021, and while it’s not yet a trend, it could become one fast.
UK Macro: The Momentum Fades
Across the Atlantic, the UK economy is cooling sharply. After a surprisingly strong start to 2025, GDP shrank 0.3% in April the worst print since late 2023 driven by a reversal in trade and distortions in domestic spending (think car sales and stamp duty-related activity). With front-loaded US demand fading, UK exports to the US fell by £2 billion in a single month.
Labor market slack is also building. Payroll employment is dropping, vacancies are down across sectors, and wage growth is easing. The BoE will likely stick to its quarterly easing cycle come August, but the risk now is that energy shocks from the Middle East delay disinflation progress. The government’s fiscal headroom is minimal, and tax hikes are almost certainly on the way if growth disappoints or the geopolitical crisis worsens.
This is one of those moments where geopolitical risk and macro fragility collide. The USD may have found a temporary floor thanks to war premiums, but with softer inflation and labour data still piling up, markets will have to choose which narrative dominates safety or stimulus.
Carry trades are vulnerable, risk assets are fragile, and oil volatility is now the wildcard. We’re heading into the weekend with tension rising in both Tehran and trading desks.
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