War in the Middle East throws the global economy into chaos

Volatility and outright chaos saw global inflation expectations rise and central banks prepare to change tone on the path of interest rates. Latest news: “Iran is ready to abandon its nuclear program on the condition that the United States presents a rewarding alternative offer,” Deputy Foreign Minister Khatibzadeh said.

USD:

The USD has been volatile as markets try to dissect the many possible outcomes from the war in the Middle East. Initially USD strengthened as investor flocked to the safe-haven USD. EUR/USD has fallen from a one-month high of 1.1900 to 1.1650 today.

Markets are now expecting the US to cut interest rates SLOWLY in 2026 after strong services and employment data yesterday. The odds of a July rate cut fell to 39% - the lowest %age of 2026.

GBP:

The UK ‘s reliance on LNG from the Middle East has raised inflation fears and rate cuts from the Bank of England look less likely - which has strengthened GBP vs EUR - now at 1.1500. This comes just as sticky inflation in the UK appeared to be receding and the employment outlook was improving.
The duration of the war will determine the overall impact on prices and the path of rates. Now, unfortunately the prospect of ‘stagflation’ will arise it’s head again.

EURO:  

Surging energy prices have knocked the EURO, which sits at 1.1500 vs GBP and at 2 month lows vs USD. Rumours of Iran wanting to ‘discuss a truce’ will help the euro recover, but it will need more than that to recover fully - Europe remains vulnerable and struggles to exert power. Data also shows a weak outlook for the Eurozone - Retail Sales dropped 0.1% month-on-month in January, while it was expected to grow 0.3%

Elsewhere:
Australia: The Australian dollar remains strong, despite weak export data overnight - the central bank now seems committed to raising rate and keeping the AUD strong as inflation fears return - GBP/AUD around 1.9100 with further falls likely.

China: Chinese officials have set a very modest growth target of 4.5% - 5% for 2026 - the lowest target for a number of years and shows that the Chinese economy suffers from global and domestic headwinds and the authorities are taking a very ‘pragmatic’ stance. which is inline with President Xi’s aim to double the Chinese economy by 2035 (relative to 2020).

This weeks data:
Friday:
EUR: ECB President speech / GDP / Employment data
USA: Employment data