Strait of Hormuz Shock: Oil Rates and FX Reset

Data as of 13th of March 2026

Catalyst

On the 28^th of February 2026, the United States launched missile strikes against Iranian targets, dramatically escalating tensions in the Middle East and sending shockwaves through global energy markets. The conflict immediately raised fears over the security of the Strait of Hormuz, one of the world’s most critical oil transit chokepoints.

Roughly 20% of global oil supply passes through the Strait, making it one of the most strategically important corridors in global trade. Following the strikes, tanker insurance costs surged, and shipping activity slowed to a standstill, effectively creating a closure of flows through the region.

For markets, the branching point is stark: does this end in a matter of days, weeks, or does it evolve into a drawn-out regional conflict with no definable endpoint? A prolonged conflict would be a major drag on global trade just as the world is still digesting the tariff-driven inflation and growth hit.

Primary Impacts

Oil

With roughly 20% of global oil supply flowing through the Strait of Hormuz, markets rapidly repriced crude following the escalation. Brent crude initially climbed toward $75 per barrel, before reaching $91 by the end of the first week of the conflict as traders began pricing in a larger risk premium.

Early discussions among analysts centred around one key upside risk for oil markets: whether the conflict would extend beyond shipping disruptions in the Strait to directly impact energy infrastructure across the Middle East. That risk quickly materialised. Iran and its regional allies launched retaliatory strikes on energy infrastructure across Qatar, Saudi Arabia, and the UAE, targeting key refining and export facilities. Meanwhile Iranian energy infrastructure also faced strikes from US forces.

Missile Strike Locations in the Middle-East

Source: BBC

As a result, when markets reopened on Monday, WTI crude futures gapped sharply higher, briefly reaching a session high of $119 during Asian trading. However, prices later retraced after President Trump signalled that the conflict was “nearly over”, sending crude back toward the mid-$80 range during the New York session. However, escalations this week have brought it back to just over $100 at the time of writing.

Rates

The initial market reaction followed a similar geopolitical pattern: a flight to safety into US treasuries, pushing yields lower as investors sought defensive assets. However, this move proved short-lived. As energy prices surged, markets began repricing inflationary implications of higher oil prices, leading to a rapid shift in rate expectations.

According to the CME FedWatch  Tool, markets have pushed expected rate cuts further into the year, with the first cut now priced around the September FOMC meeting, and many participants expecting only a single cut in 2026. This marks a significant shift from earlier in the year when markets were pricing two to three cuts, starting around the June meeting. Back home, analysts are suggesting the RBA could raise rates once again as early as this month’s meeting.

Although the United States is now a net exporter of oil, rising crude prices still feed through to higher gasoline prices for consumers. Pump prices have already begun rising, creating a significant political challenge for the Trump administration, particularly as the affordability crisis remains a key issue ahead of the upcoming midterm elections.

Secondary Impacts

Credit

As a result of higher forecasted rates, credit spreads have widened sharply. High yield credit has significantly sold-off, which is visible in the decline of the HYG. According to BetaShares, more than $55 million ETF fund flows have poured into cash, money markets, and fixed income ETFs, showing how investor sentiment is shifting to a heavy risk-off environment. Tightening credit conditions will most likely negatively impact broad based equity indexes such as the S&P 500, with the index already down around 3% since the conflict began.

FX

When thinking about the impact this is going to have on FX markets, the key aspect to think about is: Is the country a net exporter or importer of energy? Net exporters of energy, such as the US, Canada, Norway, and Australia have remained resilient throughout the conflict as seen in the diagram below. Meanwhile, net importers have struggled, namely the EUR and JPY, which rely heavily on energy imports.

Terms of Trade Hitting FX Markets

Source: Convera, Macrobond

Looking Ahead

Beyond the immediate geopolitical implications, the conflict is beginning to feed through the broader macro transmission channels that connect commodities, rates, credit, and currencies.

Higher oil prices act as an inflationary supply shock, forcing markets to reassess the pace of monetary easing and pushing bond yields higher. This tightening in financial conditions is already beginning to spill into credit markets, where widening spreads signal rising caution among investors.

At the same time, the energy shock is driving a clear divergence in currency markets through the terms of trade channel, with energy exporters outperforming import dependent economies. If the conflict persists, these cross-asset dynamics could reinforce one another, amplifying volatility across global markets.

Ultimately, the most important variable for markets remains the duration and scale of the conflict. If the Strait of Hormuz remains disrupted for an extended period, the resulting supply shock could push oil prices materially higher and prolong the inflationary pressures already facing the global economy.  For now, markets remain highly sensitive to developments in the region. Continued disruptions to shipping flows or further strikes on tankers and energy infrastructure could quickly translate into renewed volatility across oil, rates, credit, and foreign exchange markets.

In the near term, markets are likely to remain headline-driven, with price action across commodities and currencies closely tied to developments surrounding the Strait of Hormuz.

Note: This is not an exhaustive analysis and information is correct up to the time of writing.