Tensions between Israel and Iranian-backed Shia militias in Iraq, including Kataib Hezbollah and other Popular Mobilization Forces factions, remain the central driver of trader assessments on potential Israeli military action. Israel conducted multiple airstrikes on militia targets in Iraq during the 2026 Iran war to disrupt operations supporting Tehran, and revelations in May 2026 confirmed two covert Israeli forward sites in the western desert used for logistics and search-and-rescue during strikes on Iran. These sites sparked clashes with Iraqi forces that killed at least one soldier. As of late September 2026, the Iraqi government’s deadline for militia disarmament coincides with the scheduled U.S. troop withdrawal, with militias resisting and Israeli officials monitoring for possible attacks on Israel or U.S. interests. Baghdad has warned of pre-planned Israeli responses, while Israel has asserted its right to act against threats originating from Iraqi territory. Upcoming militia statements or cross-border incidents could shift probabilities before any market resolution window closes.