Oil, inflation, and Bitcoin are now locked in the same trade

Can Bitcoin continue climbing if diplomacy fails, oil surges, and inflation forces Powell to delay rate cuts yet again?

Crypto markets react to Middle East crisis

Global investors have entered a period of heightened caution, with crypto markets feeling the pressure amid renewed geopolitical instability. 

On the night of Jun. 13, Israel launched targeted airstrikes on Iran’s nuclear facilities in what it described as a “precise, preemptive” operation. Within hours, Iran responded with a wave of drones and missiles, escalating fears of a broader regional conflict.

Within 90 minutes of the initial reports, Bitcoin (BTC) dropped around 3%, falling from $106,000 to just under $103,000. 

Ethereum (ETH) saw a more severe correction, sliding nearly 8% to approximately $2,443. Across the crypto market, more than $60 billion in value was erased in a single day.

Leveraged traders were hit especially hard. Liquidation data shows that over $428 million in long positions were wiped out within 24 hours, reflecting how unprepared many participants were for the sudden spike in volatility.

Traditional financial markets also reacted sharply. Gold surged to a record high of $3,436 per ounce, as investors moved capital into safe-haven assets. Oil prices jumped around 10%, driven by concerns over possible disruptions to supply routes in the Middle East.

U.S. equities initially followed a risk-off pattern. On Jun. 14, the S&P 500 fell 1.1%, the Nasdaq dropped 1.3%, and the VIX, Wall Street’s benchmark volatility index, rose 15% to its highest level in a month. 

However, as tensions showed signs of containment over the weekend, markets began to stabilize. As of Jun. 16, both the S&P 500 and Nasdaq have rebounded, each gaining over 1%.

Crypto prices have also partially recovered. Bitcoin is trading near $106,800, up 1.7% in the past 24 hours. Ethereum has climbed nearly 4% to around $2,610. 

Despite the bounce, overall sentiment remains cautious as statements from political leaders have kept uncertainty elevated. 

Israeli Prime Minister Benjamin Netanyahu said the campaign would continue “as many days as it takes,” while Iran’s Supreme Leader Ayatollah Khamenei promised “severe punishment.” 

Amid this, attention is now turning to the U.S., where key economic data, including retail spending, will be released this week. Let’s understand how together with the ongoing Middle East crisis, these macro signals could shape the market sentiment in the coming days.

Weak retail numbers could shift Fed outlook

The May inflation report came in slightly below expectations, offering some relief to investors. 

The Consumer Price Index rose 0.1% in May compared to April, a softer reading than forecasts had anticipated, keeping the annual inflation rate close to 2.4%.At the wholesale level, the Producer Price Index also undershot expectations. 

Taken together, the CPI and PPI data suggest that inflation pressures may be easing across both consumer-facing and production layers of the economy.

Financial markets reacted quickly. U.S. Treasury yields dipped after the CPI release, with the 10-year briefly falling to 4.32%. However, renewed Middle East uncertainty has since pushed yields back up, with the 10-year returning to 4.42% as of the latest reading.

A cooling inflation trend generally reduces the probability of further rate hikes, which tends to support sentiment across risk assets. 

That said, inflation numbers are only one part of the broader macro outlook. May retail sales data, due shortly, is expected to show a 0.6% month-over-month decline. 

A weaker-than-expected reading would suggest slowing consumer demand at a time when household spending drives nearly 70% of the U.S. economy.

If that slowdown is confirmed, traders may begin to more seriously factor in potential rate cuts, especially if the Federal Reserve shifts its focus toward supporting growth rather than strictly managing inflation. 

Market participants are also looking ahead to the Fed’s next policy meeting on Jun. 18. According to CME FedWatch data, there is a 99.9% probability that rates will remain unchanged at 4.25% to 4.50%. 

While no immediate policy move is expected, Chair Jerome Powell’s comments during the post-meeting press conference will be closely watched.

Investors are particularly focused on how Powell frames the recent jump in energy prices following the Israel-Iran conflict. If he signals concern that rising oil costs could slow the disinflation trend, it may dampen expectations for near-term policy easing.

Crypto at the crossroads of war and policy

One possible outcome is a renewed escalation in the Middle East. A further intensification of conflict would likely revive inflation concerns, prompt central banks to maintain a cautious stance, and trigger a sharp retreat in global risk assets. 

Capital would likely move into traditional safe havens, keeping upward pressure on gold prices, which are already trading near record highs.

Another scenario involves the return of diplomacy. Prior to the recent airstrikes, Oman had been preparing to host indirect talks between the U.S. and Iran. Although those discussions have since paused, diplomatic efforts have not entirely faded. 

Should diplomatic efforts resume and lead to a pause in hostilities, markets would likely respond with relief. Oil prices could pull back as war-related risk premiums unwind, allowing inflation expectations to stabilize. 

Such a development would likely ease pressure on both central banks and risk assets, including crypto.

There is also a third, less definitive possibility. Neither escalation nor diplomacy may fully play out, resulting in a prolonged stalemate.

In that case, military activity could remain limited, but tensions would persist. Markets might adjust to a quiet but uneasy status quo, with sentiment fluctuating around headlines rather than decisive events.

At the same time, incoming U.S. economic data could deliver mixed signals. Retail sales may show signs of a slowdown, reinforcing expectations for rate cuts. 

Unless either the geopolitical situation or the macroeconomic narrative breaks meaningfully, crypto markets are likely to remain rangebound. 

Strait of Hormuz risk could reignite inflation

Short-term calm has replaced last week’s panic, but underlying concerns remain, especially around energy markets and the potential inflation fallout. 

Tracy Jin, Chief Operating Officer at MEXC, described the recent crypto recovery as a sign that “the market is starting to calm down after the recent geopolitical tension.” 

Still, she pointed to the Strait of Hormuz as a critical point of vulnerability. Roughly 20% of the world’s oil supply, around 20 million barrels per day, passes through the strait. Any disruption, she warned, could push Brent crude prices toward $115 per barrel.

According to her estimates, a move of that magnitude might add between 70 and 90 basis points to inflation by year-end. 

That would directly challenge expectations for rate cuts and potentially reset risk appetite across markets. High-volatility assets like crypto would be especially vulnerable.

Jin also flagged a second-order effect for Bitcoin specifically. As a proof-of-work network, Bitcoin’s mining profitability is partly tied to energy prices, which are influenced by oil and gas markets. 

If geopolitical tension tightens global energy flows, higher electricity costs could compress mining margins and put added pressure on BTC’s price.

Despite the lingering overhang, options market data suggests investors are positioning for more than just downside. Glassnode reports a significant flip in Bitcoin’s 25 Delta Skew, a metric that tracks the relative cost of bullish versus bearish options. 

The 1-week skew has shifted from -2.6% to +10.1%, and the 1-month from -2.2% to +4.9%, indicating that traders are actively preparing for near-term downside or increased volatility.

ETF flows further reinforce that institutional interest remains strong. Over the past week, spot Bitcoin ETFs saw net inflows of $1.3 billion. 

Jin noted that “institutional flows are still going to be the main driver” for the medium term. A supportive macro environment, including a softer dollar and improving liquidity, could help sustain that trend.

Meanwhile, an interesting anomaly is unfolding in oil markets. As noted in The Kobeissi Letter, “some of Iran’s largest oil and gas facilities are shut down and destroyed,” yet prices have turned red. 

The market reaction suggests traders may be assuming a low likelihood of extended supply disruption, or perhaps that demand-side risks, including weaker global growth, are playing a larger role. 

For now, conditions appear stable, but few are taking that as a given. As always, trade wisely and never invest more than you can afford to lose.