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The situation in the Strait of Hormuz remains a primary driver of global market volatility as investors react to conflicting signals between the White House and Tehran regarding an "end game" to the month-long conflict. The DXY Index declined 0.7% alongside a 10% fall in Brent crude on Monday after President Donald Trump extended last Saturday’s 48-hour ultimatum by five additional days, delaying strikes on energy infrastructure until at least 28 March. However, oil and USD rebounded quickly on Tuesday once Iran denied that talks were taking place, signalling that investors remain desperate for a credible off-ramp, despite their scepticism, this week.
Trump’s original 48-hour ultimatum may have been designed not only as a threat to Tehran, but also as a lever to press the Gulf Cooperation Council (GCC) states into military and financial commitments they once avoided. That fear of Iranian retaliation has now become a reality, as all six GCC members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) have been targeted by missiles and drones since the conflict began on February 28. Saudi Arabia and the UAE are reportedly pressing Washington to fully dismantle Iran’s military power rather than accept a wounded regime that leaves a regional vacuum.
Hence, Trump’s strategy may be to mirror the "burden shifting" playbook used in the Ukraine-Russia conflict, which seeks to transition from American aid toward a regionally led security architecture. Ultimately, GCC participation allows Trump a path to offshore the conflict to local partners, enabling the US to move into a support role, opening the door for a Trump "off-ramp. Trump could frame a potential withdrawal not as a retreat, but as an "America First" victory for his support base. By urging the GCC to take the lead, he can tell MAGA voters that he successfully ended another "forever war" and stopped policing the world for countries that can afford to protect themselves.
The markets may be looking at a "Pakistan Pivot" as the systemic circuit breaker, betting that Islamabad-hosted summit can deliver a transactional ceasefire where the 2023 Beijing-brokered peace failed. With Saudi Arabia and Qatar’s recent expulsion of Iranian diplomats marking the definitive end of the old regional détente, investors have shifted their focus to a more hard-nosed crisis management model led by Pakistan and backed by China. This new diplomatic channel, leveraging Pakistan’s neutral power status and lack of US bases, is being viewed as a credible mechanism to unchoke the Strait of Hormuz and prevent the 20% global energy shortfall from triggering a permanent global recession. The market's gauge for a diplomatic breakthrough has now converged on the potential Islamabad summit, where a meeting between US Special Envoy Steve Witkoff and Iranian Speaker Mohammad Bagher Ghalibaf, if it materialises, would serve as an encouraging signal that a pragmatic "off-ramp" is replacing the threat of a systemic energy shock.
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