Markets celebrate as Iran peace deal is reached
Markets have been cheering the US-Iran framework deal to end their conflict, which sent oil prices to the lowest levels since the early days of the conflict.
Highlights:
US-Iran framework peace deal leads to oil price decline, supports risk sentiment.
Commodity currencies underperform but dollar stays resilient.
US CPI inflation rises but broader second-round effects appear absent.
ECB raises rates for the first time in three years, stays non-committal.
Markets await the first Fed meeting overseen by new chair Warsh.
BoJ is set to raise rates this week, markets will focus on communications.
Markets anticipated and news over the weekend confirmed that a peace agreement between the US and Iran was finally within reach this time. Oil prices cratered, bonds rose, stocks soared, the SpaceX IPO was executed without a hitch, and almost every major currency worldwide rose against the US dollar, led by sharp rises in emerging market currencies. However, the dollar has proven remarkably resilient overall. The outperformance of the US economy and a sense that institutional degradation in the US is not as bad as feared have restored some of the greenback’s luster. It has only given up a small fraction of its war gains against European currencies. Emerging market currencies, by contrast, have generally performed much better through the entire war-and-peace cycle.
While the ECB meeting last week turned out to be the non event everyone expected, this week’s Federal reserve meeting promises to be quite lively. Rates will almost certainly be left unchanged by the FOMC on Wednesday, but the sharp dissent among voting members about the next move will be in focus. It will also be a big week in the UK, as May inflation data is released on Wednesday followed by the Bank of England June meeting Thursday. in addition to the by-election that will decide whether Andy Burnham can challenge Keir Starmer for the Labor party leadership. Major central bank meetings will thus compete for traders’ attention with the fallout from the US-Iran agreements, the full details of which have yet to be released.
GBP
The recent trend of general Sterling outperformance relative to European currencies will be seriously tested this week. Key news are expected in the macroeconomic, monetary and political fronts. The inflation report for May out Wednesday will colour the key Bank of England meeting the following day. No change is expected, but the number of hawkish dissents from the Monetary Policy Committee (MPC) will provide key information on the likelihood of hikes this year in the UK. Finally, Andy Burnham’s win in the Makerfield by-election on Thursday is far from a sure thing, though he is the odds-on favourite. A surprise defeat by Starmer’s challenger would probably bring about a quick pop in the pound. All in all, it will be one of the busiest weeks for Sterling in 2026.
EUR
The ECB hiked rates and succeeded in avoiding committing in any way to future moves. While the press conference was perceived as dovish, subsequent statements by ECB officials insisted that a July hike remains on the table. The deal between the US and Iran is an unambiguous positive for both the Eurozone economy and the common currency, though the latter’s reaction so far has been underwhelming. This week is light in news there, though there may be revisions to the June inflation data, and the ZEW investor survey may see the first uptick on peace news optimism. We expect the Euro to trend towards the top of its recent range buoyed by the peace agreement and investor optimism.
USD
While headline inflation rose to 4.2% due to the energy price spike, the core subindex had better news for the Federal reserve, staying just below 3% and coming in a bit lower than expected. However, producer prices continue to show inflation spreading through the supply chain. High inflation and resilient economic data will give ammunition to the hawks in this week’s FOMC meeting, while the doves will take heart from the peace agreement and the sharp fall in future energy prices, which will undo mechanically most of the price spike. We do expect the dollar to resume its gradual trend down as the support from sage haven flows reverses at least partially, and the coming massive AI IPOs add to the endless supply of Treasury debt in expanding the amount of dollar assets looking for a buyer.