Markets Brace for Weekend Shock as Oil and Tariffs Threaten Global Recovery

Currency markets are heading into the weekend in a cautious mood, with traders reluctant to take large directional positions ahead of what could prove to be a defining 48 hours for global markets. Dollar is ending the week broadly firmer but has been unable to force a convincing breakout against Euro despite another rise in US Treasury yields. Instead, higher yields and elevated oil prices are exerting greater pressure on traditional low-yielding funding currencies, leaving Yen and Swiss Franc among the week’s weakest performers. The price action suggests investors are not yet embracing a broad Dollar-safe-haven trade, preferring instead to wait for clarity on the geopolitical front before making more decisive allocations.

Markets Brace for Binary Weekend Risk from Trump’s Iran Decision

That caution is understandable given President Donald Trump’s latest comments on Iran. In an interview with Axios, Trump said he was considering a “massive attack” on Iran that could be “bigger than before” and indicated he was close to making a decision, though he declined to provide a timetable. He also said Israel would join the operation “in two minutes if I ask them to,” while acknowledging that such involvement could trigger Iranian retaliation. Those remarks have left markets facing the possibility that significant military developments could unfold while exchanges are closed over the weekend.

Oil traders remain particularly sensitive to that risk. Brent crude briefly surged above $100 a barrel on Thursday before easing back to around $97 as no immediate escalation followed. However, the retreat has done little to ease concerns that supply risks could rapidly intensify if US military action materializes. A weekend strike could leave markets reopening with sizeable gaps on Monday, potentially pushing Brent back toward the April high at $119.50. Such a move would almost certainly trigger another reassessment of the inflation outlook, driving Treasury yields higher and complicating expectations for monetary policy across major central banks.

US Tariffs Shifts from Temporary to Structural

Trade policy has simultaneously become another source of concern for investors. At 12:01 a.m. ET on Friday, the Trump administration replaced its temporary global tariff regime with new duties ranging from 10% to 12.5% covering around 60 trading partners and roughly 99.4% of US trade. While the move largely maintains the broad tariff structure that markets had already been operating under rather than introducing a fresh shock, it reinforces the administration’s commitment to a more protectionist trade framework. Combined with this week’s additional tariffs targeting Canada and Brazil, it marks another incremental increase in global trade friction.

Perhaps more importantly, Washington has made clear that the current tariffs are not the final stage of its trade agenda. The administration is continuing a separate investigation into countries accused of overproducing and depressing global prices, a process that could ultimately justify substantially higher duties on selected imports. Although any such measures may not arrive until after the US midterm elections, the investigation itself is likely to discourage businesses from assuming trade tensions will ease in the foreseeable future. Instead, companies may increasingly delay investment decisions or continue diversifying supply chains in anticipation of further policy shifts.

Can the Manufacturing-Leg Recovery Survive?

Ironically, these geopolitical and trade risks are emerging just as incoming economic data point to a healthier global economy. Flash PMI surveys released across Australia, Japan, Eurozone and the UK painted a remarkably consistent picture of improving business activity at the start of the third quarter. Manufacturing has overtaken services as the principal driver of growth, supported by firmer export demand, rebuilding industrial production, recovering technology investment and inventory replenishment. Germany and Japan stood out as leading beneficiaries of the revival in global trade, suggesting industrial activity is beginning to recover after a prolonged downturn.

The surveys also carried a reassuring message on inflation. Businesses across all four economies generally reported easing cost pressures during the first half of July as lower oil prices and improving supply conditions reduced input-cost inflation. That moderation offered central banks some breathing room after months of persistent price pressures. Yet the optimism came with a strikingly similar caveat: every survey cited the Middle East as the biggest source of uncertainty. Some manufacturers also acknowledged building precautionary inventories in anticipation of potential supply disruptions, highlighting growing concerns that geopolitical developments could interrupt production and trade.

Taken together, the week’s developments leave markets balancing two opposing forces. On one hand, the global economy appears to be entering the third quarter with stronger momentum than expected, driven by a broad-based revival in manufacturing. On the other, both higher energy prices and expanding trade barriers threaten to raise production costs and keep inflation elevated even as growth improves. That combination would represent a classic stagflationary challenge, potentially forcing central banks to keep monetary policy tighter than markets currently anticipate. Whether the encouraging macro backdrop or the mounting geopolitical risks dominate trading next week may depend largely on events over the weekend.

Gold and Silver Tumble as Oil Link Returns; Trump’s Looming Decision on Iran Adds Binary Risk

Gold and Silver are once again trading in line with traditional macro fundamentals after briefly defying higher oil prices and Treasury yields earlier in the week. With Brent above $100 reviving inflation concerns and reinforcing higher-for-longer Fed expectations, precious metals have come under renewed pressure. Trump’s looming decision on Iran now presents a binary risk: a major escalation could send oil and yields sharply higher, deepening losses in Gold and Silver, while a negotiated settlement could trigger a powerful rebound through falling oil and lower yields.

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UK PMI Composite Returns to Expansion at 52.1 as Manufacturing Leads Strongest Growth in Nearly Two Years

UK business activity returned to expansion in July, with the Flash Composite PMI rising to 52.1 as manufacturing recorded its strongest output growth in nearly two years. Services also recovered, supported by domestic tourism and seasonal demand, while easing cost pressures offered some relief on inflation. However, supply chain disruptions and rising oil prices linked to the Middle East remain key risks to the outlook. Read More.

Eurozone PMI Composite Rebounds to 51.6 as Manufacturing Powers Strongest Growth Since 2022

Eurozone business activity returned to expansion in July as the Composite PMI climbed to 51.9, its highest level in five months. Manufacturing led the recovery with the strongest production growth since March 2022, while services also moved back into expansion. Germany returned to growth, cost pressures eased, and firms added staff for the first time this year, although rising oil prices and Middle East tensions remain key risks to the recovery. Read More.

UK Retail Sales Surge 1.0% mom as Online Spending Leads Broad-Based June Rebound

UK retail sales surprised strongly to the upside in June, rising 1.0% against expectations for a decline. The strength was driven by online retailers, clothing stores and other non-food outlets as warm weather and promotional activity encouraged spending. Fuel sales remained the main drag, but the overall report points to resilient household demand heading into the second half of the year. Read More.

Germany’s GfK Consumer Climate Slips to -29.6 as Income Outlook Weakens and Saving Stays Elevated

Germany’s GfK Consumer Climate slipped slightly to -29.6 for August, showing that household confidence remains firmly depressed. While consumers became somewhat more willing to make purchases and less pessimistic about the economy, weaker income expectations and a renewed increase in precautionary saving outweighed those gains. The survey suggests German households remain cautious, limiting the prospects for a consumption-led recovery. Read More.

Japan Core CPI Picks Up to 1.6% in June, but Underlying Inflation Remains Contained

Japan’s core CPI accelerated from 1.4% to 1.6% in June, while headline inflation rose from 1.5% to 1.7%. Food costs remained the main driver, although inflation excluding fresh food slowed from 3.5% to 3.1%. Government subsidies continued to restrain energy prices, while core-core inflation eased from 1.8% to 1.7%, suggesting underlying price pressures remained contained. Read More.

Japan PMI Composite rises to 53.1 as AI Demand Boosts Manufacturing

Japan’s private sector expanded at its fastest pace since February in July, with the Flash Composite PMI rising to 53.1 and extending the current growth streak to 16 months. Manufacturing was the clear outperformer, as factory output accelerated on continued demand from the semiconductor and AI sectors, while services activity eased modestly. Read More.

Australia PMI Composite Hits 2026 High at 52.6 as Domestic Demand Rebounds

Australia’s private sector gathered momentum in July, with the Flash Composite PMI rising from 50.4 to 52.6, its strongest reading of 2026. Growth was led by the services sector, while manufacturing continued to stabilize and new orders increased for the first time in five months, pointing to a recovery in domestic demand. Businesses also reported easing cost pressures, suggesting inflation continues to moderate even as activity improves. Although firms remained cautious about the outlook amid global uncertainty, the survey indicates Australia’s economy entered the second half of the year on firmer footing. Read More.

USD/CAD Daily Outlook

No change in USD/CAD’s outlook and intraday bias remains neutral. On the upside, firm break of 1.4115 will suggest that pullback from 1.4247 has completed, ahead of 38.2% retracement of 1.3480 to 1.4247 at 1.3954. Retest of 1.4247 should be seen next. For now, outlook will remain bullish as long as 1.3954 holds, in case of another dip.

In the bigger picture, current development suggests that fall from 1.4791 has completed as a three wave correction to 1.3480. It’s still early to judge if rise from there a corrective bounce, or resumption of the larger up trend from 1.2005 (2021 low). But in either case, retest of 1.4791 high should be seen next.

Economic Indicators Update