Middle East conflict escalation drives up oil prices, Euro and Yen both come under pressure!

Weekly Market Overview

Last week, the US Dollar Index rose by 0.65%, leading to a collective decline in non-US currencies. Among them, the Euro fell by 0.22%, the Japanese Yen experienced the most significant drop of 1.38% for the week. Additionally, the Australian Dollar declined by 0.56%, and the British Pound decreased by 0.92%. Behind this decline were not only central bank policy signals but also the reorganization of safe-haven flows triggered by escalating Middle East tensions.

Federal Reserve Maintains Hawkish Stance, EUR/USD Faces Double Pressure

The Federal Reserve’s FOMC meeting held rates steady as expected, but the dot plot revealed market expectations of easing—cutting rate hike projections from three to two times this year, with a noticeable increase in officials supporting maintaining current rates. Chairman Powell hinted that inflation pressures may rise in the future, maintaining a generally hawkish tone.

This policy signal exerted direct pressure on EUR/USD. However, the real “killer” came from the worsening Middle East situation— as conflicts intensified, crude oil prices surged, which in turn became a boost for the US dollar. As the US is a major energy exporter, recent years have seen a stronger correlation between oil prices and the dollar index; in contrast, Europe’s dependence on energy imports is much higher, so rising oil prices directly dampen European economic outlooks, further pressuring the euro.

Goldman Sachs warns that if Iran blocks the Strait of Hormuz, a critical global energy artery, over 20% of the world’s oil and liquefied natural gas shipments could be disrupted, potentially pushing oil prices above $100 per barrel.

Technical Insights: Although EUR/USD has experienced a correction, it remains within an upward channel. If it falls below the 21-day moving average support at 1.144, the next key support level is around 1.135. Conversely, if it regains upward momentum, the previous high of 1.163 will serve as resistance. Notably, once Middle East tensions ease, the “de-dollarization” narrative may resurface, providing an opportunity for the euro to rebound.

This Week’s Focus: Closely monitor developments in Middle East tensions and the release of US PCE inflation data, both of which will significantly influence EUR/USD direction.

Bank of Japan Turns Dovish, Yen Safe-Haven Aura Fades

Last week, USD/JPY rose by 1.38%, driven by both policy and geopolitical factors.

The Bank of Japan maintained its policy rate but announced a gradual adjustment to its quantitative easing exit—reducing bond purchases at a more moderate pace starting from April 2026. This signal was immediately interpreted by markets as a dovish shift, causing expectations of rate hikes within the year to decline. Nomura and Goldman Sachs’ latest forecasts point to January 2026 as the next window for BOJ rate hikes.

Meanwhile, the escalation of Middle East conflicts triggered a chain reaction impacting the yen. Crude oil prices increased by nearly 10% over the past ten days, and Japan imports over 90% of its oil from the Middle East—making energy imports a heavy burden at this moment. The previously held view of the yen as a safe-haven asset is unraveling, as Japan’s economic vulnerability to rising oil prices becomes evident.

Analysts generally believe that short-term crude oil prices are unlikely to trend downward significantly, and USD/JPY will continue to be supported.

Technical Insights: USD/JPY has successfully broken through previous consolidation zones. The RSI indicator remains upward, with momentum intact, suggesting further upside potential. The near-term target is set at the previous high of 148.65. If it pulls back after reaching this level, support is expected around 145.

This Week’s Focus: Developments in Middle East tensions and US economic data will be decisive. If conflicts escalate further, USD/JPY may continue to rise; otherwise, it could face a correction.

Summary

The core drivers of the current forex market have shifted from simple monetary policy divergence to a complex interplay of “central bank expectations + geopolitical risk premiums.” Every development in Middle East tensions influences oil prices in real-time, which in turn impacts global exchange rates. As risk assets, both the euro and yen are under pressure, but the persistence of this pressure depends on how the conflict evolves—if tensions ease, market sentiment could reverse just as quickly. Investors should closely follow the latest Middle East developments and remain prepared for marginal policy changes.