Triple Digit Oil Remains a Flashpoint for Markets
Triple digit oil continues to be a flashpoint for financial markets given how closely high energy prices tie into expectations for the direction of global interest rates. Right now, we have Brent crude trading just north of $100 per barrel, with WTI sitting just south of that psychological level. This week there has been a lot for the market to digest, from mixed messaging over the US’s attempts to coordinate a coalition naval convoy, to select tankers being allowed safe passage through the Strait of Hormuz, and the uncertain fate of the Kharg Island energy depot following US strikes on nearby military targets.
As such, headlines around the Strait of Hormuz and Kharg Island continue to see-saw oil prices and leave the broader financial market in a state of flux. Whether oil heads toward $120 or retreats back below $80 remains subject to whether the current conflict escalates or de-escalates from here. While this question remains open, risk appetite is likely to remain stifled.
Gold has been trading in uncharacteristically muted fashion since the conflict began, as rising US Treasury yields and dollar appreciation have served to kneecap the price of the precious metal. Gold is still finding buying support around the $5,000 level, but a breakout move higher has remained elusive despite the war now entering its third week with no clear endgame in sight. Despite this subdued performance, a bullish case can still be made for gold as both an inflation and uncertainty hedge. The stronger USD is making life difficult for the metal, but even if inflation worries continue to prop up the greenback, gold’s allure as a store of value should stand it in good stead. Technical levels to watch include support around $4,970, with immediate resistance at $5,043 and $5,081.
In FX, the dollar has largely been following the direction of oil prices since the Iranian conflict began, as higher energy costs feed inflation concerns and scale back Fed rate-cut expectations. In the past 24 hours we did see a shift in this dynamic, however, with oil gaining a few percent while the greenback eased. The dollar, having hit fresh 10-month highs this week with the DXY climbing just above 100.50, started to look a little overstretched, explaining the retreat toward the 99.50 level. However, if WTI oil again moves back past $100, it could easily drag the "Petro Dollar" higher with it.
Elsewhere in the currency market, the Australian dollar is sitting pretty around the 0.7100 level, having risen on the back of Tuesday’s RBA interest rate hike. While it was a close 5-4 voting split, the central bank has signalled that more hikes could be on the way. This positions the RBA as the most hawkish G10 central bank, a factor that is driving home gains for the AUD, which is now up around 6.5% year-to-date against the USD.
Looking ahead, the FOMC meeting concludes Wednesday US time. No rate change is expected, but traders will be paying very close attention to any suggestion that high energy prices could delay monetary easing. Central banks are waiting to see if these elevated oil prices are a temporary blip or a running theme for 2026, in which case we may see more global peers pivot from a dovish to a hawkish stance.
