There was a theory that any major escalation between the U.S. and Iran would stay on hold until the FIFA Club World Cup was out of the way. Reality, however, had other plans — already on July 10, Trump declared the ceasefire with Iran effectively dead, and the U.S. has now been striking targets inside Iran for nine straight nights.
Hence, oil prices are back above $85 per barrel, while gold (XAUUSD) is once again trying to hold the $4,000-per-ounce level.
But could it be that things from here will only get worse now that the cup has ended?
Could be the case as over the past week alone, at least three American service members have been killed, while the Pentagon is reportedly preparing to expand its military operations across the region.
But if we look at the oil market, investors still don’t seem convinced that a major escalation is imminent — even amid reports that Yemen’s Houthi rebels have begun imposing a maritime blockade on Saudi Arabia.
Now, if the situation does deteriorate, the world could face another wave of inflation, although temporary, but significant enough to force central banks to keep monetary policy tighter for longer.
Thus, the fact that U.S. CPI fell 0.4% month-over-month in June, versus expectations of -0.1%, doesn’t necessarily mean inflation is getting back under control. July’s data could easily disappoint again. Meanwhile, Kevin Warsh has made it clear that bringing inflation back to 2% remains the Fed’s top priority and that policymakers won’t tolerate persistently elevated inflation.
As for Europe, the ECB is widely expected to leave interest rates unchanged this week. Still, it could hint at a more hawkish stance should tensions continue to rise around one of the world’s key oil shipping routes.
On the bright side, if markets do start getting nervous, we could always see another round of TACO from the U.S. president.
