Beneath the Cease-Fire: Why Geopolitical Risks Still Threaten Energy Markets and Emerging Currencies

The Iran-Israel cease-fire announced in June 2025 brought a temporary reprieve to markets, but the fragile agreement has left global investors with a stark reality: geopolitical tensions remain a critical wildcard for energy prices and emerging market currencies. While the immediate threat of a regional war has eased, the unresolved issues—from Iran's nuclear ambitions to territorial disputes—continue to underpin risks that could upend markets at any moment. Here's how to navigate these risks and position portfolios for what's next.

The Cease-Fire's Fragile Foundation

The June agreement, brokered by U.S. President Donald Trump, was immediately overshadowed by conflicting claims. Iran's state media declared it “imposed” the truce, while Israel framed it as a negotiated settlement. Almost immediately, reports of Iranian missile strikes on Israeli targets and retaliatory airstrikes resurfaced, underscoring the cease-fire's instability.

The key vulnerability? The Strait of Hormuz, through which roughly 20% of global oil exports flow, remains a chokepoint. While shipments have continued uninterrupted, Iran's parliament has voted to close it—a “tail risk” analysts warn could spike oil prices above $100/barrel if triggered.

Energy Markets: Oversupply vs. Geopolitical Volatility

The cease-fire has, so far, averted a supply shock, but OPEC+ production surges have created a different problem: a global oil glut. Post-ceasefire, Iran's output hit a seven-year high of 3.5 million barrels/day (bpd), while Saudi Arabia ramped up to 9.6 million bpd. This oversupply, combined with U.S. shale rebound, has pushed West Texas Intermediate (WTI) down nearly 7% since June 1 to $67/bbl.

But the market is walking a tightrope. A single flare-up—like a renewed Iranian missile attack or U.S. sanctions relapse—could reignite fears of Strait closures, pushing prices sharply higher.

Analysts at Barclays caution that oversupply could push prices below $70/bbl by early 2026. Yet, with geopolitical risks still simmering, volatility is inevitable. Investors in energy stocks or ETFs (e.g., USO) should consider hedging with long-dated puts to protect against sudden spikes.

Emerging Market Currencies: Fragile Gains, Lingering Risks

The cease-fire's initial impact was a rally in risk assets and a drop in oil prices, which has buoyed oil-importing emerging markets. The Egyptian pound, Turkish lira, and Gulf currencies saw short-term gains as cheaper energy eased fiscal pressures.

But the gains are precarious.

Gulf Currencies: Pegged but Not Immune

The Saudi riyal, UAE dirham, and Qatar riyal remain dollar-pegged, but their stability hinges on regional calm. Qatar's role as a mediator has helped, but any re-escalation could destabilize these currencies. Meanwhile, the Fed's divided stance on rates adds another layer:

• Federal Reserve Split: Seven Fed officials want rates held at 4.25-4.5% through 2025, while 10 predict cuts totaling 0.5%. This uncertainty keeps dollar volatility elevated, indirectly pressuring Gulf currencies.

Turkish Lira: Carry Trade Rebound, but Risks Linger

The lira gained 2% against the dollar in June as risk appetite improved, but it's still down 25% year-to-date. The Turkish Central Bank's aggressive rate hikes (now at 49%) and FX interventions have stabilized liquidity, but structural issues—like a $25 billion trade deficit and political tensions—limit gains.

Investors betting on carry trades (borrowing cheap dollars to invest in TRY-denominated assets) face a high bar: Turkey's five-year CDS (a gauge of default risk) remains elevated at 343 bps.

Asia and LatAm: Winners of Lower Oil Prices

Countries like India, South Korea, and Mexico have seen currencies strengthen as energy costs decline. The South Korean won and Mexican peso are up 3% and 2%, respectively, since mid-June.

Investment Strategy: Navigating the Crosscurrents

1. Oil: Go Long on Volatility, Not Direction
2. Trade Idea: Buy straddles (call + put options) on crude oil futures. A $10/barrel move—up or down—could yield outsized gains.

3. ETF Option: Consider short-term inverse ETFs (e.g., DWT) if you expect a prolonged supply glut, but pair with long positions to hedge against surprises.

4. Currencies: Favor Stability, Avoid Overexposure

5. Gulf Currencies: Avoid long-term bets unless the cease-fire solidifies. Short USD/TRY positions could profit if the lira rebounds, but keep stops tight.

6. Safe Havens: Allocate 10-15% of portfolios to gold (GLD) or the Japanese yen (FXJ), which tend to outperform during geopolitical flare-ups.

7. Equities: Look to Energy Plays with Downside Protection

8. Oil Majors: Companies like BP (BP) and Chevron (CVX) offer dividends and balance sheets resilient to volatility. Pair with put options for downside protection.

9. Avoid: Overweighting Middle Eastern equities (e.g., Saudi Arabia's Tadawul index) until the cease-fire proves durable.

Final Take: Risks Remain, but Opportunities Are There

The cease-fire has calmed markets temporarily, but the Iran-Israel conflict is far from resolved. Investors should treat this as a pause in volatility, not an end. Positioning for both oil's oversupply and its geopolitical risks, while avoiding currencies and assets overly tied to regional stability, offers the best path forward.

The lesson? Geopolitical risks aren't just headlines—they're a permanent feature of this market. Stay vigilant, and don't mistake calm for safety.