Energy Shocks, Rate Hike Bets Send Global FX Markets into Turmoil

The global foreign exchange market is experiencing significant turmoil due to various factors, including escalating military conflicts between the US and Iran in the Middle East. The conflicts have directly targeted critical energy infrastructure and oil tankers, pushing crude oil prices towards $100 per barrel.

This supply disruption has further compounded by diesel crack spreads surging past $100 for the first time on record, signaling an acute energy shock that threatens broader economic growth. Simultaneously, sluggish recovery of Qatari LNG exports has sent European natural gas prices soaring to levels not seen since 2022.

The US Federal Reserve's impending rate hike is also contributing to market volatility, with probability metrics leaning heavily towards a rate increase. The European Central Bank is also anticipated to deliver a 25 basis point hike, and the Reserve Bank of Australia is weighing tighter policy. Meanwhile, the Japanese Yen has surged due to rising JGB yields, stronger real wages, and shifting macroeconomic fundamentals.