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Dollar in consolidation mode, despite Middle East escalation

Financial markets have largely taken the latest escalation in the Middle East over the past week in stride. Having spiked from $87pb to $90pb on the news of today’s attack, Brent crude oil has now fallen back to below $88pb. Similarly, the big moves in safe havens like government bonds, gold and the dollar have largely unwound, leaving the greenback broadly unchanged on the week. This suggest to us that some of the risk had already been priced in, and that market participants continue to expect limited further escalation. This implies that another round of tit-for-tat attacks that threatens to widen the conflict and disrupt energy supply chains could cause a stronger flight to safe assets. That said, our base case remains that the impact of Middle East tensions on financial markets will stay limited.

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