Gold & oil volatility grows amid Middle East escalation

Financial markets are bracing for the uncertainty surrounding Iran's recent strike on Israel and the potential for retaliatory measures.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, remarked that the current situation may lead to elevated gold and oil prices, alongside lower US Treasury yields and stocks compared to what would have been expected otherwise.

In the previous week, investors flocked to gold, driving it to reach new record highs. Will we see more records hit this week? Early trading this Monday Asian session has shown a gap upwards.

Since April 1st, the energy market has been on edge regarding a potential Iran-Israel conflict, hinting at the likelihood of highly volatile oil trading in the upcoming week. Additionally, concerns arise over signs of Iran's inclination towards a soft blockade of the Strait of Hormuz, which could result in supply chain disruptions and increased oil prices.

The escalating tensions may also further prompt the Federal Reserve to exercise caution in interest rate cuts, as higher oil prices could steer inflation away from the Fed's target. On Friday, the U.S. dollar index surged to its highest level since November, while the euro dipped to a five-month low against the dollar following indications from the European Central Bank of potential interest rate cuts. This broad strengthening of the dollar also drove the yen to a fresh 34-year low as investors monitored for potential intervention by Japanese monetary authorities to stabilize the currency.