Markets are on edge this morning after a dramatic escalation in the Middle East conflict overnight with Gulf energy infrastructure being targeted and rhetoric ramping up from President Trump.
Yesterday, Israel launched strikes on Iran’s South Pars which is part of the world's largest natural gas field. Iran then retaliated overnight attacking Qatar's Ras Laffan natural gas processing complex twice within 12 hours causing extensive damage. Other missile and drone strikes have also been seen/intercepted in other Gulf State energy plants such as Kuwait, UAE, and Saudi Arabia.
Trump responded to say that there would be "no more" Israeli attacks on South Pars, but warned that if Iran "unwisely decides to attack” Qatar again, the US would "massively blow up the entirety of the South Pars Gas Field at an amount of strength and power that Iran has never seen or witnessed before." The threat has sent shockwaves through markets with crude oil prices surging up to $118 per barrel and some big falls in major stock markets.
Analysts have warned that damage to key gas processing facilities of this kind could take months or years to repair, potentially triggering a long-lasting global gas shortage. Europe remains particularly exposed given its reliance on LNG imports and, consequently, European stock markets have seen some of the more significant falls this morning. The situation is fluid and markets are currently pricing in a prolonged disruption to Gulf energy flows. Any sign of de-escalation could trigger a sharp reversal in oil prices and a shift in currency rates (away from perceived safe havens, such as the USD). Until then, volatility is likely to remain elevated and risk appetite fragile.
In other news, as widely expected, the Federal Reserve kept interest rates on hold last night and they highlighted that uncertainty over the economy remains high and that the full impact of the war is still unclear. Later today, both the BoE and ECB are widely expected to keep interest rates on hold. However, the tone of the accompanying statements will be closely watched given that oil-driven inflation is complicating the path back to their target inflation levels.
As a result, the GBP/USD fell a cent overnight and currently trades around 0.5cent from the lows seen last week (i.e. the 3-mth low). The EUR/USD is down a cent from yesterday’s high and close to the lowest levels since the start of August last year. The GBP/EUR remains buoyant but caught within the familiar range we’ve seen this past week.
