In brief:

Middle East tensions remain elevated with Houthi missile/drone attacks on Israel and Israeli strikes causing temporary blackouts in Tehran
U.S. continues military build-up, including Special Forces, as planning for potential ground operations progresses
Pakistan to host U.S.-Iran talks, while Trump signals mixed messaging: progress in negotiations but escalation options remain
Oil opened higher but pared gains, reflecting ongoing uncertainty around Hormuz flows
BoJ maintains tightening bias, while Japan ramps up FX intervention rhetoric, helping push USD/JPY lower
RBI FX caps provide modest INR support via forced positioning adjustment
Australia cuts fuel taxes despite growing supply shortage risks, raising policy questions

Geopolitical developments continue to dominate the macro backdrop to start the week, with the Middle East conflict showing further signs of regional expansion.

Over the weekend, Iranian-backed Houthis launched missile and drone attacks toward Israel, marking a widening of the conflict footprint. At the same time, Israeli strikes reportedly caused temporary power outages across Tehran and surrounding areas, highlighting the ongoing intensity of the campaign.

On the U.S. side, the military build-up in the region continued. Several hundred Special Operations Forces, including Army Rangers and Navy SEALs, have been deployed alongside thousands of Marines and 82nd Airborne troops. According to U.S. officials, this positioning is aimed at providing President Trump with additional optionality, including the potential for ground operations.

Diplomatically, Pakistan said it will host U.S.-Iran talks in the coming days. However, messaging from Washington remains mixed. President Trump said negotiations are progressing through both direct and indirect channels and could yield a deal soon, while also cautioning that no agreement is guaranteed. He added that Iran has allowed 20 oil tankers to transit the Strait of Hormuz, suggesting some limited easing in flows. At the same time, Trump reiterated that the U.S. could seize Iranian oil infrastructure, including Kharg Island, underscoring that escalation risks remain firmly in play.

Oil prices opened higher but have since edged lower, reflecting this push-pull between de-escalation hopes and ongoing risks.

In Asia, the Bank of Japan Summary of Opinions reinforced a gradual tightening bias, with policymakers open to further rate hikes if conditions allow. However, caution remains due to Middle East uncertainty and rising oil prices, with some members flagging stagflation risks.

Japan also stepped up FX rhetoric. Vice Finance Minister Atsushi Mimura warned that “decisive” action could be taken against speculative currency moves, marking a clear escalation in intervention signalling. This was reinforced by Governor Kazuo Ueda, who emphasised the growing importance of FX in shaping inflation. While not explicit intervention, the tone shift from Ueda helped push USD/JPY lower from near 160.50 to below 160, trading around 159.75 at the time of writing.

Elsewhere, the Indian rupee firmed slightly after the Reserve Bank of India imposed new FX position caps after Friday’s close. The move forces banks to reduce short INR positions, providing near-term currency support and signalling a more active defensive stance from policymakers.

In Australia, the government announced a cut to fuel taxes in response to rising prices. However, the policy raises questions given the growing risk of diesel shortages. While lower taxes may reduce prices and boost consumption, they do little to address supply constraints and may, at the margin, exacerbate the imbalance between demand and available fuel.