Prolonged Iran conflict to keep commodity markets on edge ahead of FOMC, China data

Commodities Outlook for next week

• Commodity markets to focus on upcoming FOMC policy decision
• Fed funds rate widely expected to remain unchanged
• US–Iran standoff remains a key driver of global markets next week

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Escalating tensions between the US, Israel, and Iran continued to unsettle global financial markets, driving a sharp rise in oil prices and intensifying fears of a stagflationary environment.

The US Dollar Index climbed to 100.54, its highest level since May 2025, as investors flocked to the US dollar, the primary global safe-haven asset, amid rising tensions in West Asia. At the same time, markets are increasingly concerned that elevated energy costs could reignite inflation, potentially limiting the ability of the Federal Reserve to cut interest rates aggressively and contributing to firmer US Treasury yields. Traders have already scaled back expectations for easing, now pricing in just one rate cut toward the end of the year.

Recent US economic data also supported the dollar. Weekly jobless claims fell to 2,13,000, housing starts rose to an 11-month high, and fourth-quarter GDP was revised down to 0.7 percent, while the Core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, edged up to 3.1 percent, complicating the policy outlook. Against this stagflationary backdrop, the three major US equity indices logged a third consecutive weekly decline, each falling more than 1 percent.

Precious metals also faced pressure as the stronger dollar and higher Treasury yields weighed on non-yielding assets, with COMEX gold slipping nearly 2 percent for a second consecutive weekly decline and COMEX silver falling more than 3 percent. Liquidity stress during the broader market sell-off also triggered forced liquidation in bullion, although continued purchases by the People's Bank of China helped limit gold’s downside.

Base metals delivered mixed performance. Zinc recorded the smallest decline, followed by aluminium, which edged slightly lower to settle around $3,439 per tonne. Aluminium briefly traded near multi-year highs as escalating tensions disrupted shipments through the Strait of Hormuz, a key maritime route for Persian Gulf producers that account for roughly 9–10 percent of global aluminium supply. Reports of delivery suspensions from smelters in Qatar and Bahrain heightened concerns over near-term supply availability. Copper, however, ended the week lower at around $12,780 per tonne, weighed down by the stronger US dollar, rising oil prices, and broader macro uncertainty.

Crude oil exhibited extreme volatility, surging 30 percent to $119.5 per barrel on Monday following the previous week's 35 percent rally. Although prices later eased, both West Texas Intermediate and Brent crude still posted gains of around 10 percent for the week, closing above $99 and $103 per barrel, respectively, as geopolitical tensions and uncertainty over the duration of the conflict raised fears of supply disruptions.

In his first public remarks since assuming the role of Iran’s supreme leader, Mojtaba Khamenei reiterated that closing the Strait of Hormuz should remain a strategic tool to pressure the US and Israel, while warning neighbouring countries hosting US military bases that they could become potential targets. Additional support for oil prices came as the US Navy is not yet ready to escort commercial oil tankers through the Strait, suggesting supply flows may remain constrained in the near term.

Meanwhile, the International Energy Agency has agreed to release around 400 million barrels from strategic reserves, though even a record coordinated draw would cover only about 20 days of the roughly 20 million barrels per day of oil flows that could be at risk if the Strait were significantly disrupted.

Oil prices may remain supported after the US strikes on military sites near Kharg Island, a key terminal for Iranian oil exports. Although the island’s energy infrastructure was not directly targeted, warnings from Donald Trump that Iranian oil facilities could be targeted if Tehran continues to disrupt shipping have heightened concerns over further supply risks, with traffic through the Strait of Hormuz already down to a fraction of normal levels.

MCX Crude oil futures witnessed gains of more than 8 percent throughout the recent week. The price witnessed a parabolic move immediately after breaking out of a long- term wedge pattern on the weekly chart. After recording the all-time high of Rs 10,549 per barrel on MCX, the price managed to retrace back near the Rs 9,000 zone, marking the most volatile week in the counter.

The ongoing crude volatility is likely to continue with upside momentum for the coming weeks. The critical support is now placed at the Rs 7,300 mark. The upside momentum is likely to push prices towards the Rs 11,000-11,500 mark within the next few weeks. A break below Rs 7,300 could pause the momentum and send the counter into a sideways zone.

Looking ahead, markets will focus on the upcoming policy decision from the Federal Reserve, where rates are widely expected to remain unchanged, but updated economic projections will be closely watched. Decisions from the European Central Bank and the Bank of England, along with US producer price index data and weekly jobless claims, will also be in focus. However, with no signs of de-escalation more than two weeks into the conflict, the US–Iran standoff remains a key driver of global markets.