Markets Cheer Pause In US-Iran Conflict, But Hormuz Closure Clouds Outlook

Risk sentiment improved markedly at the start of the week after the United States and Iran suspended military strikes over the weekend, encouraging investors to unwind part of last week’s geopolitical premium. Brent crude, which briefly traded above the psychologically important $100 mark last week amid fears of a prolonged supply disruption, opened sharply lower with a sizeable downside gap before stabilizing around $85. The retreat in oil prices eased immediate concerns about another inflation shock and helped revive demand for risk assets.

The improvement in sentiment was reflected across global equity markets. In Asia, Nikkei closed 0.50% higher while KOSPI gained 0.97%. European markets extended the rally, with Germany’s DAX outperforming by more than 1.5% at the time of writing. US equity futures also pointed to a strong Wall Street open, with Dow futures advancing more than 500 points. While these moves were far from euphoric, they suggested investors were willing to price in a scenario where the Middle East conflict stops short of developing into a sustained regional war capable of causing prolonged disruptions to global energy supplies.

However, the relief rally may be running ahead of developments on the ground. The US military halted two weeks of strikes to give diplomatic efforts “some space,” while Iran has similarly refrained from attacking regional targets. Yet diplomacy remains indirect, with Washington and Tehran still communicating through intermediaries rather than engaging in formal negotiations. That leaves considerable uncertainty over whether the pause can evolve into a durable ceasefire.

More importantly for financial markets, the key driver behind last week’s surge in oil prices remains unresolved. Iran’s Foreign Ministry spokesperson Esmail Baghaei reiterated on Monday that “the situation in the Strait of Hormuz has not changed and it is still closed.” In other words, while missiles may have stopped flying for now, one of the world’s most important energy shipping lanes remains shut. Traffic through Hormuz continues to be severely disrupted, while attacks affecting shipping in the Red Sea have yet to normalize. The simultaneous disruption of both Gulf and Red Sea export routes continues to pose a significant risk to global energy supply chains.

That distinction between military de-escalation and physical supply normalization is important. Financial markets can remove geopolitical risk premium quickly once tensions appear to ease, but restoring shipping flows is a much slower process involving security assessments, insurance costs and the gradual return of commercial traffic. Unless meaningful progress is made toward reopening Hormuz, oil prices could regain some of the lost risk premium even if direct military confrontation remains paused.

Beyond geopolitics, markets now face a busy week for central banks. The Federal Reserve, Bank of England and Bank of Japan will all announce policy decisions within the next few days, and although each is widely expected to leave interest rates unchanged, the accompanying guidance could prove far more important than the decisions themselves.

The Fed arguably carries the greatest uncertainty. Under Chair Kevin Warsh, the FOMC has shifted toward shorter policy statements and significantly reduced forward guidance, placing greater emphasis on the voting pattern itself. Minutes from the previous meeting showed that several officials had already been prepared to vote for an immediate rate hike before agreeing to wait for more evidence. Markets will therefore pay close attention to whether more policymakers formally dissent in favor of tighter policy, providing another indication that the Committee continues to lean toward further rate increases if inflation risks persist.

The BoJ also retains considerable surprise potential. Recent media reports suggest policymakers are increasingly open to accelerating the pace of policy normalization from roughly one hike every six months to something closer to quarterly adjustments. Whether that shift materializes will depend heavily on the Bank’s updated Outlook Report and whether revised inflation and growth forecasts justify a faster tightening cycle. Meanwhile, at the BoE, the spotlight will fall on whether concerns over persistent inflation, previously highlighted by external MPC member Megan Greene and Chief Economist Huw Pill, begin to attract broader support within the Committee.

Currency markets reflected the cautious improvement in sentiment rather than the start of a new trend. Swiss Franc outperformed as falling oil prices reduced pressure for additional global policy tightening, while Aussie found support from improved risk appetite ahead of this week’s monthly CPI release. Canadian Dollar lagged as crude prices retreated. Yet despite these relative moves, almost every major currency pair and cross remained comfortably inside last week’s trading ranges. That suggests investors are consolidating positions rather than establishing fresh directional trades, waiting for this week’s central bank decisions—and developments in the Middle East—to determine the next major move.

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