Last week, US indices showed high volatility. Markets were reacting to developments in the Middle East and comments made by US President Donald Trump. Hints that the conflict could possibly be at an end sent indices higher before signs of escalation pushed them lower again. The dollar has been one of the main beneficiaries of the conflict in the Middle East, and has gained ground against most of its counterparts. It's hardly surprising, really. Although the conflict indirectly affects the interests of every country on Earth due to its impact on energy supplies, the US is in a better position than European countries in terms of energy security.
Brent crude oil prices are experiencing high volatility. They briefly reached $119.49 at the beginning of the week but then pulled back. By the end of the week, however, the energy commodity was headed up again. The key catalyst for these movements is the developments in the Middle East. The Strait of Hormuz's closure is significantly limiting energy supplies to the global market.
Fed rates decision
Recent geopolitical events are forcing the US Federal Reserve to make a difficult choice. The conflict in the Middle East is pushing energy prices higher, which affects the prices of most goods and services and thus increases expectations of higher inflation. Inflation in the US is currently sitting at 2.4%, which is still slightly above the Fed's target. As a result, the regulator is forced to keep rates relatively high. Recent data, however, have reflected a significant deterioration in the labour market. For now, global analysts expect the Fed to keep rates unchanged. This is good news for the dollar but unfavourable for assets denominated in it, such as gold. Against this backdrop, the XAU/USD may continue to correct downward toward 5,000.00.
Bank of England's key rate decision
According to the latest data, UK inflation has fallen to 3%, but that's still higher than the Bank of England's target level. Given the crisis spreading throughout the energy market as a result of the conflict in the Middle East, energy prices are rising, which will negatively impact consumer prices. That's why global analysts expect the Bank of England will keep its key interest rate unchanged at its March meeting. This is good news for the pound in the short term. Against this backdrop, GBP/USD could start to rise to around 1.3360.
ECB's key interest rate decision
The ECB previously indicated that it was prepared to pause its rate-cutting cycle since inflation remained within its target range and the economy was showing modest signs of recovery. However, the Middle East conflict and the associated rise in energy prices could push inflation higher. That said, global analysts expect the ECB to leave its key rate unchanged at its current meeting, opting for a wait-and-see approach instead. This is a positive factor for the euro. The EUR/USD pair could resume its rise to 1.1540.