Oil prices rose again in early Wednesday trading, following a more than 4% jump the previous day, as the Iran-Israel conflict entered its sixth day and raised fears of supply disruptions in one of the world’s most critical oil transit points. President Donald Trump called for Iran’s “unconditional surrender” on Tuesday, while the U.S. military began deploying additional fighter aircraft to the region. Market concern continues to center on the Strait of Hormuz, through which around one-fifth of the world’s seaborne oil passes.
The risk of conflict-related supply issues intensified after two oil tankers collided near the Strait on Tuesday and caught fire. The United Kingdom Maritime Trade Operations also reported electronic interference affecting ship navigation systems, which may further complicate safe passage in the area. Despite the growing tensions, analysts suggest that other OPEC members possess sufficient spare capacity to offset any significant decline in Iranian exports. Iran is the third-largest producer in OPEC, pumping roughly 3.3 million barrels per day, but the group is believed to have as much as 6 million barrels per day in available spare capacity.
Investor attention is now split between these geopolitical developments and the second day of the U.S. Federal Reserve’s monetary policy meeting, which concludes later today. The Fed is expected to hold interest rates steady in the 4.25% to 4.50% range, but the release of its updated dot plot and Chair Jerome Powell’s comments are likely to influence the outlook for monetary policy for the rest of the year. The ongoing Middle East conflict adds an additional layer of complexity to the Fed’s decision-making, as a sustained increase in oil prices could renew inflationary pressures at a time when U.S. economic data has begun to show signs of weakness.
Retail sales fell 0.9% in May, a sharper decline than the 0.7% drop economists had forecast, and well below April’s modest 0.1% dip. Industrial production also slipped by 0.2%, reversing a small gain in the prior month. These reports reinforced expectations that the Fed will begin cutting rates as soon as September, and partially capped Tuesday’s gains in the U.S. dollar. The greenback edged lower on Wednesday, offering some support to gold prices, which have been trading in a narrow range just below $3,400 per ounce.
The precious metal has extended its sideways movement for a second day, as traders remain cautious ahead of the Fed’s announcement. Although the dollar remains supported by safe-haven flows tied to the geopolitical situation, the broader acceptance of an eventual Fed pivot is acting as a counterweight. Any signal from Powell that the central bank remains on track for rate cuts would likely boost gold, which continues to benefit from safe-haven demand driven by the intensifying Israel-Iran conflict and rising trade-related risks.
Adding to trade uncertainty, President Trump indicated that new tariffs targeting the pharmaceutical sector are imminent. This latest development comes ahead of the July 9 deadline for reciprocal U.S. tariffs and adds another headwind for investor sentiment already shaken by the war and soft economic data.
With markets trapped between conflicting forces geopolitical tensions pushing oil and gold higher and economic softness increasing the likelihood of monetary easing traders appear reluctant to commit to strong directional bets ahead of the Fed’s announcement. The Fed’s tone and outlook, combined with any further escalation in the Middle East, will likely set the course for oil, gold, and broader risk assets in the days ahead.
