Positive Signs in US-Iran Peace Talks Trigger Nearly 5% Gap Lower in Oil Prices

Market Wrap-up: Iran Peace Hopes Trigger 5% Oil Slump as USD Weakens Ahead of Core PCEMarkets traded relatively steadily during Friday’s session as President Donald Trump hosted the official inauguration ceremony of Kevin Warsh as Chair of the Federal Reserve.

Against a backdrop of heightened global uncertainty and rising inflationary pressures driven by the Iran war, Trump continued emphasizing expectations for aggressive rate cuts during the Fed era under Kevin Warsh.

However, markets are increasingly moving in the opposite direction, with investors now fully pricing in an additional 25bps Fed rate hike before the end of 2026. This marks a sharp reversal from earlier this year, when markets were still expecting multiple rate cuts.

These expectations are also reflected in broader inflation expectations across financial markets, with investors now believing US inflation could rise toward 4% over the next 12 months.

Wall Street closed higher on Friday, while Gold and Oil prices edged slightly lower ahead of the Memorial Day holiday on Monday. However, the latest developments from the Middle East quickly disrupted the relatively calm market tone seen late last week.

Ongoing peace talks between the United States and Iran revived hopes that both sides could eventually reach a broader peace agreement, although President Trump stated on Sunday that several differences still remain unresolved.

This triggered sharp gap moves at the start of Monday’s session, with WTI crude opening nearly 5% lower at around $92.40 per barrel. The DXY Index also fell sharply toward the key psychological 99.00 level.

Meanwhile, Gold surged more than 1% to $4,580 amid expectations that the Strait of Hormuz could potentially reopen in the near term.

This could help ease concerns over persistent inflation pressures and potentially allow the Fed to gradually shift toward a more dovish tone.

Besides monitoring further developments surrounding the potential peace agreement, markets will also focus on several key US economic releases this week, including Unemployment Claims, Preliminary GDP, and the Fed’s preferred inflation gauge, Core PCE.

In addition, traders should note that the US, UK, France, and Germany are observing bank holidays today, which could result in thinner liquidity conditions and potentially sharp market volatility.

Gold: Gold Jumps Above 4,580 as Weak USD and Iran Deal Expectations Boost Demand

Key takeaway:

Gold prices advanced as the US Dollar weakened following reports that the United States and Iran are moving closer toward a potential agreement that could reopen the Strait of Hormuz.

Traders will closely monitor the US Personal Consumption Expenditures (PCE) Price Index report, scheduled for release later on Thursday. Any signs of accelerating US inflation could reinforce expectations for further Fed tightening and limit upside momentum in Gold prices.

Technical Outlook:Daily Bias: Bullish.Support: 4,500  Resistance: 4,589WTI: Crude Prices Gap Lower on Progress in US-Iran Peace Negotiations

Key takeaway:

Oil prices opened sharply lower at the start of the week as the United States and Iran signaled progress in negotiations aimed at ending the conflict.

US Secretary of State Marco Rubio stated on May 21 that “encouraging signs” have emerged, suggesting a potential agreement to end the conflict may be taking shape.

According to a recent MUFG report, energy industry leaders warned that Middle East oil supply may not fully normalize before 2027 due to the severe level of disruption caused by the conflict.

Technical Outlook:Daily Bias: Bearish.Support: 88.65  Resistance: 93.82

DXY: US Dollar Retreats Toward 99.00 as Middle East Risks Begin to Ease

Key takeaway:

The DXY Index declined sharply as improving prospects for a peace agreement in Iran supported broader risk sentiment and reduced safe-haven demand for the US Dollar.

Nevertheless, persistent inflation pressures and the fact that the Strait of Hormuz has not yet officially reopened continue to support expectations that the Fed may eventually lean toward further rate hikes rather than cuts, which could help limit downside pressure on the USD.

Technical Outlook:Daily Bias: Bearish.Support: 98.97Resistance: 99.40

EUR/USD: Euro Firms Amid Growing Expectations of ECB Rate Hikes

Key takeaway:

The Euro strengthened modestly against the US Dollar amid growing optimism surrounding a potential US-Iran peace agreement.

Additional support for the Euro came from expectations that the ECB is increasingly likely to deliver a rate hike in June.

The ECB kept its key interest rates unchanged in April but discussed the possibility of further tightening and hinted that a move could come at the June policy meeting as elevated energy costs continue to pressure inflation.

Technical Outlook:Daily Bias: Bullish.Support: 1.15955  Resistance: 1.16449

USD/JPY: Yen Strengthens Amid Broad Dollar Weakness and BOJ Rate Hike Expectations  

Key takeaway:

The Japanese Yen strengthened as the US Dollar weakened amid signs of progress toward a potential US-Iran agreement to reopen the Strait of Hormuz.

Meanwhile, Japan’s National CPI rose 1.4% YoY in April, compared with 1.5% previously. Core CPI also slowed to 1.4% YoY, marking its lowest level in four years.

The inflation data will remain a key consideration ahead of the Bank of Japan’s June policy meeting, where markets broadly expect the central bank to raise its short-term policy rate to 1.0% from 0.75%.

Technical Outlook:Daily Bias: Neutral.Support: 158.59  Resistance: 159.25

Overall, markets are currently being driven primarily by expectations of easing tensions between the United States and Iran, which has triggered a sharp decline in oil prices and weighed on the US Dollar. The move has supported broader risk sentiment across global markets while also easing concerns that an energy shock could continue fueling inflationary pressures in the months ahead.

However, markets have not fully abandoned the scenario of a still hawkish Fed, as inflation expectations remain elevated and the Strait of Hormuz has yet to officially reopen. This helps explain why the downside move in the USD remains relatively cautious despite the strong pressure on the DXY at the start of the week.

In the near term, market focus will shift toward key US economic releases including Preliminary GDP, Unemployment Claims, and especially Core PCE later this week. These data points will play a crucial role in determining whether the current pullback in the USD and Treasury yields can extend further, while also shaping expectations for the Fed’s next policy direction.

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