Oil Spikes to $114 as Iran Attacks UAE for Second Day, Safe-Haven Flows Intensify

Global markets were jolted on Monday as Iran launched its largest attack on the United Arab Emirates since the conflict began, sending oil prices soaring above $114 per barrel and triggering sharp selloffs across emerging market assets. The escalation comes as the fragile ceasefire shows signs of collapse, with the UAE reporting a second wave of attacks Tuesday morning.

Attack Details: 12 Ballistic Missiles, Oil Port Hit

The UAE Ministry of Defence confirmed that on May 4, 2026, its air defense systems engaged 12 ballistic missiles, three cruise missiles, and four drones launched from Iran. The assault resulted in three moderate injuries and struck a petroleum facility in Fujairah, the critical oil port that serves as the UAE's bypass for the Strait of Hormuz.

Breaking reports indicate Iran launched a second wave of attacks early Tuesday (May 5), with the UAE again activating air defense systems across the country. The attacks represent the most significant military escalation in weeks, directly threatening the energy infrastructure that supplies roughly 20% of global oil transit.

"The ceasefire has effectively ceased," analysts at Morgan Stanley wrote in a note to clients. "The direct targeting of UAE energy infrastructure signals a dangerous new phase in the conflict."

Oil Markets Surge, Then Pull Back

Brent crude futures jumped 5.8% on Monday to settle at $114.44 per barrel—the highest level since May 2022. West Texas Intermediate (WTI) rose 4.4% to close at $106 per barrel. The surge pushed oil prices up approximately 60% since the U.S.-Israeli war against Iran began in February.

By Tuesday morning, prices had pulled back slightly as the U.S. administration attempted to reassure markets that the ceasefire framework remains intact. As of 9:00 AM ET, Brent traded at $111.45 (down 2.6%) while WTI slipped to $102.65 (down 3.2%), though both remain dramatically elevated from pre-conflict levels.

"Even with the pullback, we're still pricing in massive geopolitical risk premium," said energy strategist Amrita Sen at Energy Aspects. "Any disruption to Fujairah directly impacts UAE's ability to export oil without using Hormuz—that's existential for energy markets."

Emerging Markets Under Pressure

The MSCI Emerging Markets Index dropped sharply Monday, reversing gains made earlier in the week when peace hopes briefly lifted sentiment. Currency pairs with high oil import dependence led losses, with the Turkish lira, South African rand, and Indian rupee all weakening against the dollar.

"Emerging markets are caught in a vice," said James Lord, global head of FX and EM strategy at Morgan Stanley. "Oil-importing economies face twin threats—higher energy costs stoking inflation and dollar strength as safe-haven flows accelerate."

The U.S. Dollar Index ($DXY) climbed to fresh highs for the year, with the greenback strengthening across the board as investors fled risk assets. Traditional safe havens also rallied, with the Japanese yen and Swiss franc both appreciating sharply against commodity currencies.

Safe-Haven Currencies Rally

USD/JPY pulled back from recent highs as the yen strengthened on safe-haven demand, dropping 0.8% to trade near 142.50. The franc similarly gained ground, with EUR/CHF falling to 0.9450 as Swiss flows intensified.

"In crisis moments like this, capital flows follow a predictable pattern," noted currency strategist Jane Foley at Rabobank. "First into dollar and yen, then franc, then gold. We're seeing that classic flight-to-quality cascade right now."

Gold prices also surged, with XAU/USD climbing above $2,850 per ounce as investors sought traditional stores of value amid the escalating geopolitical uncertainty.

Stock Markets React, Energy Shares Diverge

The Dow Jones Industrial Average fell 560 points (1.1%) Monday, while the VIX volatility index spiked back above 20, signaling elevated fear in equity markets. European and Asian bourses also declined, with oil-importing economies hit hardest.

Paradoxically, major U.S. oil companies rallied on the price surge, with ExxonMobil and Chevron both posting gains. The divergence highlights the complex calculus facing investors—energy producers benefit from higher prices, but broader economic growth faces headwinds from the energy shock.

Central Bank Implications: Rate Cuts on Hold

The oil spike throws a wrench into central bank plans for monetary easing. Markets had been pricing in three rate cuts from the European Central Bank and two from the Bank of England by year-end, but those expectations are now being reassessed.

"If oil stays above $110, we're looking at a material cpi" title="Understanding inflation and CPI in forex">inflation impulse just as core inflation was finally cooling," warned economist Krishna Guha at Evercore ISI. "The Fed and ECB will be forced to stay restrictive longer, which is bearish for risk assets and EM currencies."

Indeed, money markets have already begun pricing out rate cuts, with U.S. year-end rate expectations rising 15 basis points in just two trading days. In emerging markets, several central banks that had begun easing cycles are now expected to pause or even hike to defend currencies and combat imported inflation.

Strait of Hormuz: The $100 Trillion Chokepoint

The attacks on Fujairah carry outsized significance because the port was designed specifically to bypass the Strait of Hormuz, the narrow waterway through which roughly 21 million barrels of oil pass daily—about one-fifth of global petroleum consumption.

Iran has repeatedly signaled it will tighten control over the strait in response to U.S. military operations, and the direct strike on UAE energy infrastructure suggests Tehran is willing to escalate beyond mere threats. The U.S. Navy reported sinking several Iranian boats in the strait over the weekend, further raising tensions in the critical waterway.

"The market is slowly waking up to the reality that Hormuz closure isn't just saber-rattling—it's a live operational risk," said commodity analyst Helima Croft at RBC Capital Markets. "If transit is materially disrupted for even a few weeks, we could see $150 oil."

What Traders Should Watch

With volatility surging and geopolitical headlines dominating price action, here are the key levels and developments to monitor:

• Oil: Support for Brent at $108-110; resistance at $120. A break above $120 would likely trigger $150+ scenarios
• Dollar: Watch DXY 105.50 as next resistance; break would accelerate EM currency weakness
• EUR/USD: Critical support at 1.0800; break targets 1.0650
• VIX: Above 22 signals sustained fear; below 18 would indicate risk-on return
• U.S.-Iran ceasefire talks: Any breakthrough would trigger sharp reversals across all asset classes

Forex traders should exercise heightened caution with position sizing and maintain strict stop-loss discipline. Overnight gaps are likely as geopolitical headlines break outside trading hours, making risk management paramount.

Outlook: More Volatility Ahead

As the UAE braces for potential further attacks and oil markets digest the supply risk, volatility is likely to remain elevated through the week. The U.S. Federal Reserve and other major central banks will be watching closely, as a sustained oil shock could derail the soft-landing narrative that has supported risk assets in recent months.

For now, the market message is clear: reduce risk exposure, favor safe-haven assets, and prepare for more headline-driven whipsaws. The ceasefire that had brought tentative calm to markets appears to be unraveling, and the next phase of the Middle East conflict is testing trader nerves—and portfolios—across the globe.