With the framework peace deal agreed, oil prices returning to pre-war levels and market participants confident that hostilities were over, we were hoping that was all she wrote on the matter. Yet just as the Iran war headlines were fading into the background, President Trump declared on Wednesday that the ceasefire was over and that the memorandum of understanding designed to end the war was dead in the water. Our initial take is that this is all part of Trump’s negotiating theatre, rather than a complete collapse in talks,though risk aversion could dominate until headlines improve.
So long as US-Iran tensions thaw as we anticipate, we expect to see a clear pivot in the second half of the year away from geopolitics and towards the return of interest rate differentials as the primary driver of currency markets.
Our view on monetary policy remains the same. We think that market pricing for hikes is, on the whole, excessive, and that the need for higher rates will be limited this year due to:
a) Brent crude oil prices have fallen 35% from the Iran war peaks (to below $80 a barrel),which should limit upside risks to inflation in the second half of 2026.
b) There are few signs that the energy spike is filtering through to underlying inflation, while slack in labour markets should keep second-order inflation effects contained.
c) Central banks are effectively tightening monetary conditions by holding rates, given that they would likely have lowered them had the war never happened.
0726.png){kind=tracking}
Stay ahead of the market—read the full July FX report.
