Markets react to new deal hopes as FOMC meeting approaches

Markets are reacting positively to the announcement of a US-Iran agreement, with investors quickly moving to unwind some of the risk premium that had built up across energy markets over recent months.

The most immediate impact has been seen in oil, where prices have fallen sharply on expectations that the Strait of Hormuz will remain open and that the risk of a prolonged supply disruption has diminished. Equity markets have responded favourably, particularly in Europe and Asia, which are more exposed to energy imports and had been more sensitive to the inflationary consequences of higher oil prices.

The agreement also has important implications for central-bank expectations. Prior to the deal, investors had become increasingly concerned that higher energy costs would feed into broader inflation pressures and potentially force policymakers into additional tightening. The sharp decline in oil prices does not eliminate inflation risks altogether, but it does reduce some of the urgency surrounding them. That is particularly relevant this week as the Federal Reserve meets for the first time under new Chair Kevin Warsh. Warsh is entering office at a difficult moment. Markets initially viewed him as more dovish than his predecessor, but persistent inflation and a resilient labour market have complicated that perception. The peace agreement may give the Fed greater flexibility to maintain a neutral stance rather than immediately leaning toward further tightening. However, policymakers are still likely to remain cautious. While the energy shock may be easing, underlying inflation pressures tied to strong economic activity and AI-related investment remain present.

The key question for investors is therefore not whether the Fed will react to lower oil prices today, but how Warsh frames the broader policy outlook. Markets are looking for clarity on whether the Fed views current inflation pressures as temporary and manageable, or whether policymakers still see a need for tighter policy later in the year. The decision itself is unlikely to surprise, but the messaging could prove critical. After weeks dominated by geopolitical developments, attention is now shifting back toward monetary policy, and Warsh’s first press conference may be the most important market event of the week.