Today's Market Outlook Escalating Middle East Risks Collide With Optimism Over U.S. Tech Investment as Focus Turns to t

Today's Market Outlook

Escalating Middle East Risks Collide With Optimism Over U.S. Tech Investment as Focus Turns to the ECB

■ Market Overview

Today's market is being shaped by two competing forces: the deepening crisis in the Middle East and renewed optimism surrounding capital expenditure by major U.S. technology companies.

The situation in the Middle East has deteriorated further.

Iran has rejected a proposal put forward by mediating countries, while the United States has deployed B-1 bombers for the first time.

Washington has also signaled the possibility of strikes on Iranian nuclear facilities, while Iran is reportedly considering the use of the Houthis to blockade the Red Sea.

The exchange of attacks between the United States and Iran has now continued for 12 consecutive days, leaving little room for meaningful peace talks.

WTI crude oil has extended its rise from the upper $88 area and moved above $90 during the London session.

At the same time, capital expenditure plans by major U.S. technology companies are providing a more positive signal for equity markets.

Alphabet's decision to raise its 2026 capital expenditure plan to as much as $205 billion has fueled expectations of a second wave of investment in AI infrastructure.

Risk aversion driven by Middle East tensions is therefore coexisting with support for equities from optimism over AI-related investment, leaving market sentiment sharply divided.

■ USD/JPY

USD/JPY has advanced into the mid-163 area during the London session.

The pair rose to around 163.44 during the London morning, reaching its highest level since 1986 and marking an almost 40-year high.

The move has been driven in part by safe-haven demand for the U.S. dollar amid worsening tensions in the Middle East.

WTI crude oil climbed above $90, while the U.S. 10-year Treasury yield rose toward the upper end of the 4.67% range, strengthening demand for the dollar.

Higher oil prices also tend to worsen Japan's terms of trade, making them an additional source of downward pressure on the yen.

As a result, USD/JPY has continued to rise as dollar buying and yen selling reinforce each other.

However, with the pair now trading in the mid-163 area, concerns over possible intervention by the Japanese government and the Bank of Japan are also likely to intensify.

If USD/JPY begins to rise rapidly toward 164, the risk of direct intervention will need to be taken increasingly seriously.

■ U.S. Dollar

The dollar has remained well supported since the start of the London session.

With no clear path toward an end to the conflict in the Middle East, higher oil prices, rising U.S. yields, and weaker equities have combined to strengthen safe-haven demand for the dollar.

EUR/USD and GBP/USD have erased the gains recorded during the Tokyo session and fallen below the previous New York close.

EUR/USD is trading around 1.1410, while USD/JPY is near 163.35, with the dollar remaining firm against the major currencies.

A further deterioration in the Middle East could generate additional dollar buying through higher oil prices and rising U.S. yields.

On the other hand, if U.S. technology shares recover and broader risk appetite improves, safe-haven demand for the dollar may begin to ease.

■ Middle East Developments

The Middle East remains the largest source of risk for markets today.

The exchange of attacks between the United States and Iran has now continued for 12 consecutive days, while the prospects for a ceasefire or peace negotiations have deteriorated significantly.

Iran has rejected a proposal from mediating countries.

The United States has deployed B-1 bombers and has also signaled the possibility of attacks on Iranian nuclear facilities.

Meanwhile, Iran is reportedly considering a blockade of the Red Sea involving the Houthis, increasing risks to energy transportation and global supply chains.

Oil prices have moved above $90, intensifying concerns over energy-driven inflation.

Middle East-related headlines are therefore likely to remain capable of triggering sharp moves in crude oil, U.S. yields, equities, and the dollar.

■ Crude Oil Market

WTI crude oil has moved above $90.

The prolonged conflict in the Middle East has intensified concerns over supply disruptions.

For the United States, higher oil prices increase the risk of renewed inflationary pressure and may reduce expectations for Federal Reserve rate cuts.

For Japan, however, higher oil prices raise import costs and worsen the country's terms of trade, adding to downward pressure on the yen.

In other words, higher crude oil prices are bullish for USD/JPY from both sides of the equation: they support the dollar and weaken the yen.

Whether crude oil can establish itself above $90 or extend its rise further is likely to have a major influence on the direction of USD/JPY.

■ Equity Markets

Equity markets are caught between risk aversion and renewed optimism over AI investment.

European equities and U.S. equity futures are trading in negative territory as the Middle East crisis deepens.

At the same time, Alphabet's decision to raise its 2026 capital expenditure plan to as much as $205 billion has increased expectations for a second wave of AI infrastructure investment.

South Korean equities extended their gains today, led by the semiconductor sector, with Samsung Electronics and SK Hynix both moving higher.

Expectations of renewed growth in AI demand are helping to support Asian equities.

If U.S. markets also continue to rise on the back of gains in mega-cap technology shares, sentiment toward equities could improve further.

However, higher oil prices and rising U.S. yields remain significant headwinds, meaning risk appetite is unlikely to strengthen in a straightforward or uninterrupted manner.

■ ECB Meeting

The ECB meeting is one of today's most important scheduled events.

The market consensus is for policy rates to remain unchanged.

At the previous meeting in June, the ECB raised rates by 25 basis points.

At the same time, the staff projections showed a higher inflation outlook and a lower growth forecast.

The move was widely viewed as an effort by the ECB to act preemptively against inflation.

Given the extreme uncertainty surrounding the Middle East, the ECB is likely to adopt a wait-and-see approach while assessing the effects of the previous rate increase.

Concerns are also returning in Europe over supply bottlenecks and cost-push inflation caused by higher oil prices.

The key focus will therefore be how ECB President Christine Lagarde balances the risks to inflation against the risks to economic growth.

■ Euro

EUR/USD has erased its Tokyo-session gains since the start of London trading.

The worsening Middle East situation has strengthened safe-haven demand for the dollar, leaving EUR/USD near 1.1410.

Ahead of the ECB meeting, the euro is unlikely to develop a strong directional trend.

If the ECB emphasizes inflation risks, the euro may find some support.

However, if policymakers place greater emphasis on the risks of an economic slowdown, the upside in the euro is likely to remain limited.

Today's main focus will be less on the policy rate itself and more on the tone of President Lagarde's press conference.

■ Today's Key Economic Data

The main economic releases scheduled for later today are:

French Business Confidence

Central Bank of Turkey Policy Decision

Canadian Retail Sales

U.S. Initial Jobless Claims

South African Reserve Bank Policy Decision

The Central Bank of Turkey is expected to leave its policy rate unchanged.

The South African Reserve Bank is widely expected to raise rates by 25 basis points.

U.S. initial jobless claims are forecast at 210,000, slightly above the previous reading of 208,000.

However, today's market reaction is likely to be driven more by the ECB meeting, developments in the Middle East, crude oil prices, and U.S. corporate earnings than by the scheduled economic data.

■ Key Events

Today's main events include:

ECB Policy Meeting

Press Conference by ECB President Christine Lagarde

U.S. 10-Year TIPS Auction

Major U.S. Corporate Earnings

The ECB meeting and President Lagarde's press conference will be the main focus during European trading.

The U.S. 10-year inflation-protected Treasury auction will also attract attention given the recent increase in inflation concerns and its potential implications for U.S. yields.

Companies scheduled to report include Nestlé, BNP Paribas, Intel, Blackstone, and T-Mobile.

Intel's earnings may be particularly important for sentiment toward semiconductor and AI-related shares.

■ Key Focus for London and New York

Markets will closely monitor:

1. Whether the ECB leaves policy rates unchanged

2. How President Lagarde describes the balance between inflation and economic growth

3. Whether WTI crude oil can remain above $90

4. Whether the U.S. 10-year Treasury yield remains elevated near 4.67%

5. Whether USD/JPY can establish itself above 163

6. Whether a move toward 164 increases intervention concerns

7. Whether U.S. technology shares recover on optimism over AI investment

8. How markets react to Intel's earnings

Geopolitical risk, monetary policy, and equity-market developments are all converging today.

Short-term volatility in FX has not yet become extreme, but sudden moves remain possible in response to new headlines.

■ Bottom Line

Today's market is being shaped by the collision between escalating Middle East risks and rising expectations for capital expenditure by major U.S. technology companies.

The exchange of attacks between the United States and Iran has now continued for 12 consecutive days. The United States has deployed B-1 bombers, while Iran has rejected proposals from mediating countries.

Crude oil has risen above $90, strengthening inflation concerns and safe-haven demand for the dollar.

At the same time, Alphabet's major capital expenditure plans have reinforced expectations of a second wave of AI infrastructure investment, prompting renewed buying in semiconductor shares.

USD/JPY has climbed into the mid-163 area and reached its highest level since 1986.

However, if the pair begins to rise rapidly toward 164, concerns over intervention by Japanese authorities are likely to intensify further.

For the remainder of the session, markets will closely watch the ECB meeting, President Lagarde's press conference, developments in the Middle East, crude oil prices, U.S. yields, and corporate earnings to assess how far the stronger dollar and the recovery in equities can continue.