Pakistan’s Prime Minister announced that the United States and Iran had reached a peace agreement, with the official signing expected in Switzerland on June 19. Following the news, S&P 500 and Nasdaq futures rose, gold edged higher, while oil prices, U.S. Treasury yields, and the dollar fell.
What matters here is not just the prospect of reduced geopolitical uncertainty. More importantly, the agreement could pave the way for the full reopening of the Strait of Hormuz, easing supply concerns, lowering transportation costs, and helping contain inflationary pressures.
Still, an immediate return to rate cuts would be unlikely, as even if the Strait of Hormuz reopens this Friday, clearing mines and restoring normal shipping operations will take time. Meanwhile, the economic impact of the disruptions in the Middle East is not only becoming visible but is already being priced in.
The ECB, for example, raised interest rates by 25 basis points, from 2.15% to 2.40%, in response to rising inflation and with inflation projected at 3% in 2026 and core inflation at 2.5%, and the official target not expected to be reached before 2028, another rate hike later this year cannot be ruled out. In Japan, markets are pricing in a 25-basis-point increase to 1% this week.
In the United States, consumer prices rose 0.5% month over month and 4.2% year over year in May, while core inflation eased to 0.2% month over month and 2.9% year over year, suggesting that the impact of higher energy prices is still fairly contained for now. Yet, numbers remain well above levels that would justify a return to rate cuts.
Against this backdrop, the base case for this week’s meeting is that the Federal Reserve will drop any easing bias and lean more hawkish. Now, if the new Fed Chair surprises markets with a dovish message, Treasury yields could actually rise if investors start to worry that the central bank is losing its independence.
It’s also worth noting that even after the memorandum is signed, the United States and Iran are expected to continue negotiations for another 60 days on nuclear issues and other sensitive topics. Positions on several of these issues remain fundamentally opposed, and it’s still unclear whether Israel will fully support the terms of the agreement, so there remains a risk that tensions could flare up again.