The Illusion of Calm
Investors were quick to declare the Middle East conflict resolved, but reality proved more complex. Each side views the situation through the lens of its own interests. For Iran, the deal meant an opportunity to sell oil at higher prices while maintaining control over the Strait of Hormuz. For the US, it meant reopening the planet’s key oil artery. Ultimately, these fundamental disagreements surfaced in full: hostilities resumed, and EUR/USD headed south.
The White House’s Achievements and Their Fragility
The US administration in mid-June sought to end the armed conflict as quickly as possible and launch an uptrend in Brent. Partially, it succeeded. Oil did indeed return to pre-war levels much faster than analysts had expected. This allowed market inflation expectations to fall from 2.5% on the eve of the Iran bombings in late February to the current 2.23%, giving Kevin Warsh grounds to announce a reduction in inflation risks at the summit in Sintra, Portugal.
Disconnect with Consumer Reality
However, American consumers do not share these optimistic assessments. According to the New York Fed survey, they expect prices to rise by 3.7% over the next 12 months — the highest figure in nearly three years. Against the backdrop of the resumption of the Middle East conflict and a potential Brent rally, the public is demonstrating a more sober view of the situation than the financial markets.
Rapid Risk Reassessment
Investors are swiftly adjusting their positions. The probability of monetary policy tightening jumped from 76% to 82% after the resumption of Iran bombings and the reimposition of restrictions on Iranian oil sales. As a result, around 63 million barrels were stranded at sea, depriving the Islamic Republic of critically important foreign currency revenue.
Reaction to Warsh’s Rhetoric
Following Kevin Warsh’s speech at the ECB summit, market participants began to gradually retreat from the idea of aggressive monetary tightening. The probability of two Fed rate hikes in 2026 at one point dropped below 30%, allowing EUR/USD to strengthen its position. However, the resumption of armed conflict in the Middle East pushed these odds back up to 42%. It is quite likely that further escalation of geopolitical tensions will bring the ratio to 50-50. The result will be a strengthening of the US dollar.
The Balance of Power
Each side pursues its own interests, but the White House’s position currently appears more convincing. Alternative supply routes and weakening global demand suggest that Brent is unlikely to reach the $120 per barrel mark even in the event of more large-scale hostilities. Nevertheless, Donald Trump prefers diplomacy, which raises hopes for a swift de-escalation of the conflict.
