Geopolitical Tensions Escalate with Direct US Involvement
Last week’s headlines were dominated by the escalating conflict between Israel and Iran, which has now seen the direct involvement of the United States. Over the weekend, the US carried out airstrikes targeting three nuclear sites in Iran. In response, Iranian authorities condemned the bombings as outrageous and warned of serious consequences.
Beyond the immediate uncertainty, the situation presents both limited and potentially far-reaching implications for global markets.
Oil Market Risk: The Strait of Hormuz in Focus
Iran accounts for approximately 4% of global oil production, but only a third of that is exported, with most exports going to China, a key ally. On this front, the immediate impact on global supply is expected to remain contained. The greater risk lies in Iran’s threat to close the Strait of Hormuz, a critical chokepoint through which about 20% of the world’s oil supply transits. On Sunday, the Iranian parliament approved the potential closure of the strait, prompting concerns about a dramatic disruption in global energy markets.
While it remains unclear whether Iran has the military capacity to fully enforce a shutdown, the narrow geography of the strait increases the plausibility of such an action using short-range weaponry. If successful, the consequences could be substantial, with oil prices likely to surge and inflationary pressures reverberating worldwide.
US Exposure and the Federal Reserve’s Dilemma
The United States would be particularly vulnerable to oil-driven inflation, given it consumes roughly 20% of global oil output. To put it in scale the US consumes 33% more than China, and several multiples more than India (x4), Russia (x5), or any other nation. This makes the Strait of Hormuz a pivotal factor not only in the geopolitical equation but also in shaping the Fed’s monetary policy outlook.
This adds further complexity to an already delicate situation for the Federal Reserve. Tensions between President Trump and Fed Chair Jerome Powell have been rising, with Trump advocating for rate cuts while the Fed maintains a cautious stance. Inflation remains above the 2% target, while the labour market, although still resilient, is beginning to show signs of softening.
If Iran were to succeed in closing the strait, the resulting spike in oil prices could add fresh inflationary pressure to the US economy. This would compound the delayed inflationary impact of recently imposed tariffs and may prompt the Fed to take an even more measured approach, potentially limiting 2025 rate cuts to just 25 basis points, down from the current 50 bps expectation. A scenario of rising inflation coupled with a weakening labour market would put the Fed in a difficult position and significantly increase the risk of a recession.
Crypto Market Reaction: Mixed Signals
The geopolitical stress has also spilled over into risk-on assets. Bitcoin (BTC) briefly dropped to $98,200 on Sunday evening before rebounding above $100,000 and is currently trading near $102,000.
Despite the volatility, BTC spot ETFs maintained positive momentum throughout last week, recording inflows on every trading day and extending their positive streak to nine consecutive sessions. However, as the US airstrikes occurred over the weekend, when traditional markets were closed, the full impact on financial instruments had not yet materialised by Sunday.
Monday and Tuesday may see outflows from BTC spot ETFs and other crypto-linked financial products, as investors digest the weekend’s developments and shift towards a more cautious, risk-off positioning amid heightened geopolitical uncertainty.
The data referenced in this announcement were compiled from reputable sources, including Binance, Glassnode, TradingView, CryptoQuant, TheBlockData, CCData and others by Fineqia’s dedicated in-house research department.