🗞️ Prolonged Middle East War Risk — Dollar Strong, FX Relatively Calm

🗞️ Prolonged Middle East War Risk — Dollar Strong, FX Relatively Calm

🌍 Expanding Frontlines, Rising Long-Term Risk

The U.S. and Israel have signaled the possibility of further large-scale attacks on Iran.
What was initially framed as a conflict that could conclude within “4–5 weeks” has shifted toward a stance that does not rule out a prolonged engagement.

• Iran’s vast territory and complex terrain

• Risk of a Hormuz Strait closure

• Potential disruption to oil supply and global supply chains

👉 Markets are beginning to price in broader global economic consequences.

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📉 Equity Markets in Risk-Off Mode

• Nikkei has posted consecutive sharp declines (at one point over -3%)

• U.S. and European equity futures continue to slide

• Israel’s Defense Ministry announced preparations for an expanded front

👉 Risk aversion remains firmly in place.

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💱 FX Market Developments

While panic-style moves have not materialized,
underlying dollar strength remains persistent.

🔹 USD/JPY

Mixed flows, but rose to a high of 157.77.
Crisis-driven USD buying + JPY selling supporting the move.

🔹 EUR/USD

Fresh low at 1.1612.
Softening into the 1.16 handle.

🔹 GBP/USD

Slipped into the 1.32s (lowest area since last December).
War risk + UK fiscal uncertainty weighing on sterling.

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🇬🇧 Sterling Faces Dual Headwinds

UK Chancellor Reeves is set to release the Spring Budget update today.

• Erosion of confidence in the Starmer administration

• Inflation fears tied to Middle East tensions

• Sharp equity declines in Europe

👉 Sterling selling pressure is evident.

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📈 Rates Market

• U.S. 2-year yield: 3.74% (+10bp)

👉 Inflation concerns are re-emerging.

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🛢 The Next Core Theme: Inflation

A prolonged war could trigger:

• Sustained oil price increases

• Logistics disruptions

• Higher production costs

This may reignite global inflation pressures.

ECB Chief Economist Lane has also warned about inflation risks.

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📊 Today’s Economic Data

• Turkey CPI & PPI

• France fiscal balance

• Eurozone HICP flash estimate

• Brazil GDP

⚠ All February data —
likely not yet reflecting the full impact of Middle East developments.

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🎙 Speaking Events

• Williams (NY Fed)

• Kashkari (Minneapolis Fed)

• Austrian & Dutch central bank governors

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🧭 Summary

✔ Geopolitical risk appears to be shifting toward a prolonged phase
✔ Equity markets are undergoing sharp correction
✔ Dollar strength continues
✔ FX markets remain comparatively orderly

The evolving theme may transition from:

“War” → “Inflation”

After the initial risk-off wave,
markets may begin shifting focus toward renewed inflation dynamics.

A key question now:
Will crisis pricing evolve into an inflation-driven trend phase?