Middle East deal optimism lingers as attention shifts to the Fed

Middle East progress but pitfalls remain

Further progress on the Middle East agreement between the US and Iran has been made overnight, as the two sides digitally signed the MoU that is supposed to contain the necessary details. There is still a plan to hold a signing ceremony on Friday – President Trump is fond of putting on a good show – signaling the official reopening of the Strait of Hormuz. Around 550 ships are still stranded inside Hormuz, with at least another 300 waiting to enter.

Crucially, starting from Friday, there will be a 60-day period of negotiations, with the US offering the carrot of reduced sanctions and unfrozen assets to convince Iran to abandon its nuclear ambitions, destroy its enriched uranium, and forgo its plan to impose tolls at the Strait of Hormuz. 

Everything seems too straightforward, though, despite (a) the Israeli leadership being extremely dissatisfied with the current agreement as it fails to address Iran’s ballistic missile programme and its broader influence in the region, and (b) Iranian officials are domestically criticized for agreeing with the ‘enemy’. Hence, we cannot exclude the possibility of last-minute drama, endangering the entire agreement.

The two aforementioned factors could offer some explanation for the small downward move in oil prices, with the front WTI oil futures contract dropping to $79, still quite far from pre-war levels, and the December 2026 futures failing to drop below the early May lows. That said, certain investment houses appear more confident about Persian Gulf exports normalising to pre-conflict levels much sooner than widely expected, which should, in principle, further push oil prices lower, and potentially limit central bank hawkish expectations going forward.

Notably, despite most global equity indices reaching fresh highs on the back of the US-Iran deal news and the lingering AI enthusiasm – SpaceX is continuing its journey north – yesterday’s initial losses of the US dollar mostly vanished. At the time of writing, the greenback is the third-best performing currency of the session, after the euro and yen, though movements are relatively small, also putting a pause on the gold rally. All eyes are gradually turning to Wednesday’s Fed meeting that could prove eventful despite the non-existent chances of a rate change.

BoJ hikes, yen still at loss

As widely expected, the BoJ hiked rates to 1%, with a 7-1 majority, and announced a pause in its bond tapering programme. The overall rhetoric was clearly hawkish – with the yearly CPI “expected to speed up well above 2%” and “to reach levels consistent with the price target between the second half of fiscal 2026 and fiscal 2027” – despite two members stating that CPI has already reached the price stability target. 

Although markets still price in an 80% probability of another 25bps hike by December 2026, the chances of a July rate hike remain exceptionally low and would be a tall ask from the BoJ, especially as the US-Iran agreement could effectively reduce upside inflation risks. This explains the minimal reaction in dollar/yen today. The pair is still hovering above the 160 level, with the BoJ potentially forced to restart its intervention machine if tomorrow’s Fed meeting triggers an upside dollar move.

RBA stands pat, aussie on the backfoot on reduced risk appetite

Finally, the RBA meeting did not hold any surprises. The cash rate was kept at 4.35% and Governor Bullock highlighted the board’s readiness to hike again, not only due to elevated energy prices but also due to labour market tightness. The aussie, along with the kiwi, is on the back foot today, partially due to some expectations for a more hawkish RBA meeting, but also due to the less aggressive risk tone in markets today, as seen by the dollar’s move.