The Hamas attack and Israel's declaration of a state of war have not triggered a strong reaction in the financial markets. The escalation of tensions in the Middle East traditionally leads to a significant rise in oil prices, which have been extremely volatile in recent days. Iran's alleged involvement in the planning of the attack may have played a significant role. A barrel of Brent crude has risen by around 3.5% since the start of the week but is still trading below 90 USD. US stock index contracts are down more than 0.5%. In the case of the S&P 500, not even half of Friday's strong rally has been erased.
Unsurprisingly, the biggest shake-up in the currency market has been in the Israeli currency. The shekel has plunged by a maximum of almost 2% and is at its weakest level since 2016 against the recently strengthening US dollar. The USD/ILS pair started to retreat towards 3.90 after the central bank launched a 30 billion USD programme aimed at reducing the volatility of the shekel's quotations. These are the first interventions in about two years. Israel's foreign exchange reserves amount to more than 200 billion USD, equivalent to almost 39% of the country's GDP. Liquidity of the local market is to be further supported by up to 15 billion USD (through swaps).
Within the main currencies, changes are only symbolic. There are minimal gains in the yen, US dollar and franc, the so-called safe haven currencies that investors flee in times of particular anxiety and uncertainty. The Canadian dollar and the Norwegian krone, the currencies most strongly linked to oil prices, also rose marginally. Nonetheless, the spike in geopolitical uncertainty and rise in oil prices favour the greenback against the common currency and the most recent EUR/USD pair’s bounce should lose momentum.