Escalation of the Iran-Iraq conflict boosts oil prices by over 6%: How does the risk in the Strait of Hormuz change the Federal Reserve’s rate-hike expectations and global markets?

In July 2026, tensions in the Middle East have once again ignited global financial markets.

Since July 8, the United States and Iran have launched a new round of intense military confrontation over the Strait of Hormuz. Within 48 hours, the U.S. military carried out two rounds of airstrikes on more than 170 military targets inside Iran; by July 14, the strikes had been upgraded to five attacks within one week. In response, Iran has fired dense salvos of ballistic missiles and drones targeting U.S. military bases in five countries—Jordan, Kuwait, Qatar, Bahrain, and Oman—setting off comprehensive security alerts across the Middle East. On July 13, U.S. President Donald Trump formally notified Congress that “the Iran war has reignited,” and announced that at 4:00 a.m. Beijing time on July 15, the maritime blockade against Iran would be restored. On the same day, two UAE oil tankers in the Strait of Hormuz were attacked by Iranian cruise missiles, resulting in 1 Indian crew member’s death and 8 injuries.

This contest over the world’s energy choke point is reshaping asset-pricing logic at an unprecedented pace.

WTI crude oil jumps more than 6% in a single day: Why the Strait of Hormuz is tugging at global energy nerves

The Strait of Hormuz lies between Oman and Iran and is the world’s most critical energy transport corridor. About one-fifth of global oil trade volume passes through this strait, and the average daily throughput once exceeded 17 million barrels.

On July 12, Iran’s Islamic Revolutionary Guard Corps Navy announced that, given that an unsafe situation has been created due to illegal interference by foreign forces, the Strait of Hormuz would be closed effective immediately. The U.S. side, meanwhile, claimed that the strait’s southern navigation route remains “open.” The fundamental disagreement between the two sides over control of the strait—Iran argues it has the right to decide whether ships may transit, while the U.S. insists on the principle of freedom of navigation—has become the core of this round of conflict.

Actual navigation data reveals how severe the problem is. According to data from the maritime analytics firm Winward, the strait’s transit volume fell sharply from 43 vessels on July 8 to 17 vessels on July 12. Citing shipping monitoring agencies, Bloomberg reported that on the 12th there was “almost no visible shipping activity”; the number of daily transits dropped from dozens at the start of the month to single digits—far below the pre-war level of more than 100 vessels per day.

On July 10, Fatih Birol, Executive Director of the International Energy Agency, warned that the Gulf region’s current average daily oil supply is only 16 million barrels, down significantly from 24 million barrels before the Middle East conflict. If transportation through the strait falls into another standstill, the outlook for crude oil supply will worsen markedly.

The market reacted quickly. According to Gate market data, as of July 14, 2026, the latest WTI crude price was $79.28, up 6.54% over the previous 24 hours; Brent crude was $83.83, up 6.06%. WanDa Insight founder Wan Danna Hali said: “As shipping through the Strait of Hormuz falls into another stall, oil prices still carry significant risk premium.”

How an energy shock transmits to inflation and Federal Reserve policy

The transmission path from oil price increases to inflation is clear and direct.

First layer: higher gasoline prices directly increase residents’ consumption costs. Current U.S. gasoline prices are already about 30% higher than before the Middle East war. Second layer: rising energy costs raise transportation and industrial production costs, which in turn push up the prices of commodities. Third layer: U.S. spring 2026 inflation has warmed again. In its semiannual policy report, the Federal Reserve explicitly pointed out that the ongoing U.S.-Iran conflict continues to interfere with shipping through the Strait of Hormuz, and that rising crude oil prices are pushing up gasoline and industrial energy costs across the United States—energy inflation is being transmitted along the entire industrial chain. The report warned that if the conflict becomes prolonged, inflation persistence will be further elevated.

The inflation pressure the Federal Reserve faces is far more than just on the energy side. The Fed’s mid-June policy meeting was the first meeting since Kevin Warsh became chair. The interest rate committee sharply raised the central point of its full-year 2026 inflation forecast from 2.7% to 3.6%, and lifted the central point of the dot plot for the federal funds rate from 3.4% to 3.8%. As of May, the Fed’s most preferred inflation gauge—the core personal consumption expenditures (PCE) index—was up 3.4% year over year, and has continued to rise since January.

In a report released on July 13, Barclays noted that current inflation concerns are no longer confined solely to energy prices. The price pass-through from oil price shocks has not ended; elevated energy prices have not effectively suppressed demand, but have instead further intensified inflation pressure. Price increases driven by artificial intelligence are also making the inflation outlook worse. Global cloud providers are massively expanding data centers; surging demand for HBM, DRAM, GPUs, and electricity is pushing up prices of chips, electronic devices, and industrial raw materials. With these factors combined, the Fed may feel compelled to take an increasingly hawkish stance.

On July 13, Fed Governor Christopher Waller said clearly that if future economic data show inflation remains far above the 2% target, the Fed may have to raise interest rates in the near term. He described monetary policy as being at a “crossroads.” Waller emphasized: “For five or six straight months, we’ve been seeing inflation data rise. If we get higher data again this time, I will treat it as a signal, not just noise.”

Probability of a Fed rate hike in July nears 50%

Market expectations are rapidly reversing.

According to the CME’s “FedWatch” tool, traders believe the probability of a 25 basis point rate hike by the Fed on July 29 has risen to 46.5%, while on July 12 (Sunday) it was only 34%. On the prediction market platform Kalshi, the rate-hike probability that traders are betting on has risen to 36%, higher than Sunday’s below 20% and also higher than below 10% earlier this month. Some reports show that the embedded probability of a July rate hike implied by money-market pricing is nearing 50%.

Swap trading data shows that the market has essentially already priced in expectations that the Fed will hike rates in September; about a week earlier, that probability was around 66%. The likelihood that the Fed will hike at least twice before the end of this year has jumped from 34% at the start of this month to 56%.

Two-year U.S. Treasury yields—most sensitive to changes in rate-hike expectations—rose as much as 7 basis points to 4.28%, the highest since February 2025; five-year yields rose to 4.37%; and 10-year yields rose 6 basis points to 4.62%, a new high since May this year.

Fed Chair Waller will attend a congressional hearing for the first time this week as the Fed’s new leader, at which time he will have the June CPI data—this is the last major inflation release before the July 29 meeting. Economists expect the year-over-year increase in June CPI to be 3.8%, down from 4.2% in May, but if the data comes in hotter than expected, the probability of a rate hike could climb further.

U.S. stock sectors diverge: Energy and defense benefit, tech growth faces pressure

Energy stocks see structural positive factors

Rising oil prices directly benefit upstream exploration and production companies. As Exxon Mobil and Chevron are the world’s largest integrated energy enterprises, their upstream profit leverage is highly correlated with oil prices. With Brent crude already above $83 per barrel, if tensions over the strait remain elevated and push oil prices even higher, earnings expectations for the energy sector could be revised upward significantly.

At the same time, global refining margins have risen to a four-year high. Russia’s diesel export ban combined with constrained Middle East refinery capacity further tightens the supply of refined products. This supply-demand configuration provides additional upside for integrated energy enterprises with refining businesses.

Defense stocks benefit from expectations of increased military spending

Escalation of conflicts is often accompanied by higher defense spending. Trump has formally notified Congress to restart U.S. military action against Iran, granting the Pentagon additional 60 days of authority to conduct military operations in the Middle East. Defense contractors such as Lockheed Martin and Northrop Grumman are expected to receive incremental orders. However, it should be noted that the logic behind the defense sector’s rise depends on the persistence and intensity of the conflict, carrying high uncertainty.

Tech growth stocks face dual pressure

Higher oil prices lift inflation expectations and compress the room for rate cuts, creating valuation pressure for tech growth stocks that rely on future cash flows. The repricing of expectations for Fed policy hikes means financing costs rise and risk appetite falls. AI-related high-valued tech stocks—although their long-term growth logic remains unchanged—may face more substantial valuation corrections in the near term.

The Fed’s semiannual policy report also pointed out that AI is both a short-term driver of inflation and a long-term force toward disinflation, with a clear time lag. This contradiction means AI-related stocks will face more complex pricing logic under the current macro environment.

Crypto market: tug-of-war between short-term pressure and long-term logic

Bitcoin shows price behavior in this geopolitical shock that is fundamentally different from that of traditional safe-haven assets.

As of July 14, Bitcoin was $62,713.3, down 0.07% over the past 24 hours. It rose 0.72% over the past 7 days and 2.46% over the past 30 days, but fell 45.66% over the past year. Market cap is about $1.25 trillion, and market sentiment is neutral.

Bitcoin failed to receive immediate safe-haven buying pressure like gold did after the conflict escalated. Spot gold fell 1.99% to $4,018.7 amid a backdrop of surging oil prices and rising Treasury yields. Vantage Markets analyst Hebe Chen said that renewed geopolitical tensions have once again hit an already fragile precious-metals market.

The crypto market currently faces three layers of short-term pressure:

First, risk appetite declines. Escalation of geopolitical conflicts usually triggers a systematic selloff of global risk assets, and as a high-volatility asset, Bitcoin cannot stand apart. Liquidity contraction in altcoins may be even more pronounced.

Second, the U.S. dollar strengthens. Rising expectations for Fed rate hikes push up the U.S. dollar index, putting pressure on Bitcoin priced in dollars. Soaring Treasury yields mean higher opportunity costs of holding non-yielding assets (such as Bitcoin).

Third, regulatory uncertainty. The U.S. restarting its maritime blockade against Iran and imposing a 20% strait transit fee signals a broader geo-economic confrontation. Against this backdrop, uncertainty in the regulatory environment facing the crypto market increases.

However, long-term logic has not disappeared. If market concerns about the credibility of the U.S. dollar and the fiat currency system deepen due to geopolitical conflict, Bitcoin’s narrative as “digital gold” may regain attention. Bitcoin has already fallen more than 45% from its historical high of $126,193, meaning valuation pressure has been released to a considerable extent.

Three key indicators investors should watch next

Oil prices are the most direct indicator for assessing inflation pressure. Current WTI crude is trading around $79 per barrel; if it breaks above the $80 key level and holds, it will further reinforce inflation expectations and raise the probability of rate hikes. Analysts believe oil prices may remain somewhat strong in the near term; going forward, the focus should be on the Strait of Hormuz’s shipping conditions, the actual extent of damage to Iran’s energy and chemical facilities, and the timing of releases from the U.S. strategic crude oil reserves.

U.S. CPI data is the core variable for judging the Fed’s path. The June CPI report will be released on July 14, the last batch of important inflation data before the Fed’s July 29 meeting. If core CPI runs hotter than expected, the probability of a rate hike in July could exceed 50%.

The U.S. Dollar Index reflects global risk appetite and liquidity conditions. A stronger dollar means emerging-market assets and risk assets face pressure, creating additional macro headwinds for the crypto market. Closely watch changes in the Treasury yield curve—when the spread between the 2-year and 10-year narrows, it often signals stronger expectations for monetary tightening.

Conclusion

Cannon fire in the Strait of Hormuz is rewriting the global asset pricing equation.

Within a week, the market narrative completed a 180-degree turn from “when will the Fed cut rates?” to “will the Fed raise rates again?” Oil prices jumped more than 6% in a day, the probability of a July rate hike is nearing 50%, and Treasury yields hit the highest level in more than a year—together these price signals point to a core conclusion: geopolitical shocks are reshaping monetary policy expectations and asset valuation logic through the most sensitive transmission channel—energy prices.

For investors, the most critical issue right now is not whether a single asset rises or falls, but how the entire macro framework is being rebuilt. In a “three highs” environment—high oil prices, high inflation, and high interest rates—traditional asset allocation logic needs to be reconsidered. The energy and defense sectors may gain phase-specific excess returns, while growth stocks and the crypto market face dual tests of valuation and liquidity.

The Strait of Hormuz’s transit lights have not turned green yet. Until this global energy artery is restored to smooth operation, the market’s volatility center of gravity will most likely remain at a relatively high level. As analysts put it, “the probability that geopolitical risk will heat up is significantly higher than the probability it will cool down.” For investors, maintaining sufficient cash reserves and risk-hedging tools may be more important than betting on the outcome in a single direction.

FAQ

Q: How big is the impact of the U.S.-Iran conflict on global oil supply?

The Strait of Hormuz’s average daily oil throughput once exceeded 17 million barrels, accounting for about one-third of global seaborne oil trade. The current average daily oil supply in the Gulf region is only 16 million barrels, down significantly from 24 million barrels before the conflict. Transit volume has fallen from 43 ships on July 8 to 17 ships on July 12. If the blockade continues, global crude oil supply will face a gap of several million barrels per day.

Q: Will the Fed really raise rates in July?

As of July 14, market pricing shows that the probability of a 25 basis point rate hike on July 29 is about 46.5%. The final decision depends on the June CPI data released on July 14. If core inflation runs hotter than expected, the probability of a rate hike could exceed 50%. Fed Governor Waller has already stated clearly that if the data show inflation remains far above the 2% target, the Fed may have to raise rates in the near term.

Q: Why hasn’t Bitcoin risen like gold?

Bitcoin in this round of conflict has shown characteristics of a risk asset rather than a safe-haven asset. Rising expectations for Fed rate hikes strengthen the U.S. dollar and send Treasury yields soaring, putting pressure on non-yielding assets. The decline in short-term risk appetite also leads to high-volatility assets being sold off. However, if market confidence in the fiat currency system wavers due to geopolitical conflict, Bitcoin’s long-term safe-haven narrative may regain attention.

Q: Which U.S. stock sectors are worth focusing on in the current environment?

The energy sector (including Exxon Mobil and Chevron) directly benefits from rising oil prices, with upstream exploration and production profits expanding as oil prices climb. The defense sector (including Lockheed Martin and Northrop Grumman) benefits from increased expectations for defense spending. Growth tech stocks face valuation pressure, as a high interest rate environment compresses the present value of their future cash flows. Investors need to make decisions based on their own risk appetite and portfolio composition.

Q: How long could the Strait of Hormuz crisis last?

Analysts believe this round of conflict is likely to take the form of “limited strikes, fighting while negotiating, and using fighting to promote talks,” and will not evolve into a large-scale, full-fledged war. The U.S. is less than four months away from the midterm elections, and domestic public sentiment rejects expanding the war in the Middle East. Iran also clearly recognizes how massive the gap is between its conventional military capabilities and those of the United States. Still, the fundamental disagreement between both sides over control of the strait is unlikely to be resolved in the short term, and “gray-zone confrontation” may continue.