Global financial markets have stabilized after the United States and Iran officially agreed to a two-week ceasefire to end their armed conflict. The announcement came just hours before a deadline set by President Donald Trump expired. Diplomatic efforts led by Pakistan are reportedly key to easing the six-week-long standoff.
Following this positive development, investor bets on a rate cut by the Federal Reserve (Fed) have risen sharply. Data from CME Group shows the probability of at least one rate cut by December has now jumped to 43%, up from just 14% previously. The market has now completely dismissed concerns about the rate hike that was previously planned to curb wartime inflation.
World crude oil prices responded by falling below $100 a barrel as soon as news of the ceasefire broke. While this decline provided some relief to the market, oil prices still remain high compared to pre-war levels of around $70 a barrel. Investors are closely watching the reopening of the Strait of Hormuz to restore the disrupted global energy supply chain.
Economists at Bank of America (BofA) have said that the Fed may have to act more aggressively if the US unemployment rate exceeds 4.5%. While inflationary risks from the Iran conflict remain, the downward trend in hiring (JOLTS data) is putting additional pressure on the Fed to ease monetary policy to support economic growth that has been hit by the war.
While the ceasefire has brought temporary relief, market volatility remains high. The process of restabilizing global oil and gas markets is expected to take months. Investors are optimistic but cautious, waiting to see whether this two-week period can produce a lasting peace agreement between the two superpowers.
