Fed, rates and oil: market relief remains conditional

A week caught between two opposing forces

The second half of the week brought markets back into a very clear dynamic: on the one hand, geopolitical relief, on the other, the return of interest rate risk. The agreement between the United States and Iran has at least partially reopened the Strait of Hormuz and reduced the immediate pressure on oil; at the same time, however, the Fed and the Bank of England reminded investors that inflation is not yet a closed chapter. The result was a market less fearful on the energy front, but more alert to the possibility that central banks will be forced to remain restrictive for longer.

On the stock market front, Wall Street outperformed continental Europe and especially the United Kingdom. In the latest available session, the S&P 500 recovered about 0.8%, while the Nasdaq performed significantly better, gaining nearly 2.4%, once again driven by technology and the artificial intelligence theme. The Euro Stoxx 50 showed a more modest recovery, around 1.2%, while the British market remained weaker, declining close to 1.0%. This picture is consistent with the week: geopolitical risk has diminished, but not enough to eliminate the uncertainty premium.

United Kingdom: Inflation remains stable, but not yet conquered

The first significant data came from the United Kingdom. Inflation in May remained stable at 2.8% annually, versus expectations of a rise to 3.0%. On a monthly basis, the CPI also rose by only 0.2%, the same pace as a year earlier. The figure was a positive surprise because the market feared a more visible impact from energy and transportation costs, especially after tensions in the Persian Gulf.

The composition of the data, however, is less reassuring than it appears. Transportation made the largest upward contribution, while food and household goods offset some of the pressure. Inflation remains above the Bank of England's 2% target, limiting the scope for a more accommodative monetary policy. The BoE kept rates at 3.75% by a 7-2 vote: a majority favored a pause, but two members already favored a hike. This signals a central bank that doesn't want to chase the energy panic, but doesn't want to ignore it either.

Fed: Warsh holds interest rates, but changes language

In the United States, the first Fed decision led by Kevin Warsh had a more profound impact than simply keeping rates unchanged. The FOMC maintained the Fed Funds corridor between 3.50% and 3.75%, but new projections shifted focus to 2026: the median rate expected at year-end rose to 3.8%, above the current level and consistent with at least one rate hike in the coming months.

The real innovation, however, was communication. Warsh abandoned the traditional forward guidance approach, implying that the Fed no longer intends to lead the market step by step. In practice, fewer preemptive reassurances and more data-driven reliance. Bond markets reacted immediately: the two-year Treasury yield rose to around 4.21%, while the 10-year yield remained near 4.46%, with a flatter yield curve. The market prices in a tighter Fed in the short term, but at the same time fears that higher rates could weigh on future growth.

The dollar also benefited from this shift in tone. The dollar index gained about 0.35%, while the pound fell to around 1.3200 against the greenback. For commodities, this represents a double bind: less geopolitical risk supports sentiment, but a stronger dollar and higher real yields reduce the attractiveness of gold and low-yielding assets.

Oil and Hormuz: Immediate relief, incomplete normalization

The geopolitical heart of the week remains the Strait of Hormuz. The agreement between the United States and Iran provided mutual benefits: the immediate reopening of maritime flows, the easing of restrictions on Iranian oil, and a 60-day negotiating window to define a broader agreement. The first oil tankers have resumed operations, with at least four reported transiting Iraqi ports, and Brent crude has returned to the $80 a barrel area, still heading for a weekly decline of nearly 8%.

The market interpreted the news as a significant easing of global inflation risk. If oil falls steadily below $80, central banks can afford to be more patient. But the situation remains fragile: full normalization in the Straits could take time, given the naval security, insurance, logistical constraints, and ongoing military tensions. This isn't a return to normalcy; it's a halt to the most acute phase of the crisis.

Middle East: Truce declared, risk still alive

The final part of the week prevented markets from turning relief into euphoria. Peace negotiations in Switzerland between the United States and Iran were postponed, just as Israeli attacks in southern Lebanon continued despite the declaration of a truce. This is crucial: the Hormuz agreement reduces immediate energy risk, but does not eliminate regional political risk.

For this reason, gold did not collapse, despite losing strength. The spot price remained around $4,280 an ounce, while gold-related instruments showed a moderate decline of around 0.4%. Copper, on the other hand, recovered about 0.6%, signaling a more positive reading on global demand if the energy crisis remains contained. Oil remains the key asset: if it falls, it supports inflation, corporate margins, and consumption; if it rises due to renewed tensions, it immediately reopens the risk of stagflation.

The message for investors

The week ended with markets feeling more upbeat, but not truly serene. The US-Iran deal has reduced tail risk on oil, UK inflation has given a less negative signal than expected, and stock markets have found room to recover. However, the Fed and the BoE have made it clear that inflation remains above targets and that interest rates cannot yet be used as an automatic safety net.

The market narrative today is this: less geopolitical panic, more attention to the cost of money. As long as Hormuz remains open and Brent crude remains near $80, risky assets can breathe. But with a less predictable Fed, a still cautious Bank of England, and the Middle East far from definitive stabilization, volatility remains a central part of the landscape.