In a normal week, central bank policy meetings in the US and UK would dominate the headlines, but given elevated geopolitical risks, it does not feel like a normal week.
That said, financial markets are showing notable resilience despite the escalating conflict between Israel and Iran and questions over whether the US will decide to support the Israeli mission to destroy Iran’s nuclear capability. With central banks in wait and see mode, it feels like we are also having to wait to see how the Middle East situation develops and if any escalation in the conflict will impact the resilience of financial markets.
Over the course of the past week Israel and Iran have continued to exchange missile attacks, with Israel focusing on gaining control of Iran’s airspace and attacking nuclear facilities. However, the most important of these facilities is deep underground, with only the US military having the weapons to destroy the Fordow facility from the air. US involvement in the conflict would clearly raise the stakes, and President Trump has made it very clear that he is considering such a course of action. US involvement may well be limited to the destruction of Iranian nuclear facilities but there are risks of being drawn into a wider conflict should Iran find a way to retaliate against the US. Meanwhile, the US continues to move military assets towards the region.
President Trump said on Wednesday that he “may or may not” order a strike on Iran. The President is reported to have approved attack plans but not yet signed off on them, awaiting any signal from Iran that it will voluntarily abandon its nuclear program. On Wednesday, Trump said, “You don’t know that I am going to even do it. You don’t know. I may do it, I may not do it, nobody knows what I’m going to do”. Trump said that he has “two very simple words for Tehran” – “unconditional surrender”. Trump said he had not indicated to Israeli PM Netanyahu if the US would get involved but did tell him to “keep going”, with Iran “totally defenceless…. we’ve totally captured the air”. Trump also said, “the next week is going to be very big”. A White House statement yesterday said the President would decide on military action “within two weeks”; this leaves a window for negotiation but also for the US to build up military assets in the region.
Iran’s supreme leader, Ayatollah Ali Khamenei, stated that “any form of US military intervention will undoubtedly be met with irreparable harm” and “wise people know Iran, its people and it its history never speak to this nation in the language of threats, because Iranians are not those who surrender”. Russian President Vladimir Putin said he had had discussions with the US, Iran and Israel but the solution to the conflict lies with Israel and Iran. Putin said Iran’s interest in “peaceful nuclear energy can be ensured”.
Financial markets have remained relatively calm throughout this process – we have seen a small flight to safety, with ‘havens’ including the US dollar seeing some demand. But equities have not seen a notable selloff, and while the oil price has shifted higher, it has not broken out towards $100/barrel or levels that would likely impact wider risk appetite. At the time of writing early on Friday morning, Brent Crude sits at $77.19/barrel, which is up just over 2.5% so far this year, and up 11% over the past week. But crude oil is still trading below the $79.85 average price during 2024, and before the breakout of hostilities last week, expectations were for the oil price to drift lower thanks to strong levels of supply and softening global demand. So long as the Strait of Hormuz remains untroubled by the conflict, then the oil price should stay contained. We should also bear in mind that the global oil landscape is very different to 20 years ago thanks to the emergence of US shale oil, and while any issues in the Strait would certainly pose upside risks to the oil price from here, the impact on the global economy should be less dramatic than previous crises.
The US Federal Reserve policy meeting on Wednesday delivered, as expected, no change to interest rate policy, with the interest rate setting committee very happy to wait and see how tariffs impact the economic landscape over the coming months. Fed Chair Jay Powell said he expects tariffs to raise prices, but their impact and duration remains “highly uncertain”. Fed officials cut their forecasts for economic growth and increased their expectations for inflation in the aftermath of tariff announcements in the past three months. In advance of the rate decision being announced, President Trump called Powell “stupid” and called for a rate cut of at least two percentage points. In the Fed’s press conference, Powell said “for the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance” but warned that “our job is to make sure that a one-time increase in inflation [from tariffs] doesn’t turn into an inflation problem”. Highlighting the ‘wait and see’ stance, Powell said “ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer. We know that’s coming, and we just want to see a little bit of that before we make judgments prematurely”. In terms of the outlook, the Fed expects US economy to grow by 1.4% in 2025 with unemployment rising from 4.2% at present to 4.5% while inflation (as measured by PCE) will increase from 2.1% in April to 3%. The previous forecasts in March showed growth at 1.7%, unemployment at 4.4% and PCE at 2.7%. The ‘dot plot’ of interest rate policy expectations still showed a median forecast of two rate cuts this year, totalling 50 basis points, but seven officials are now projecting no cuts at all this year. Market pricing remains in line with the ‘dot plot’ but given the resilience of the US economy, a labour market which in Jay Powell’s words remains “healthy”, and uncertainty over inflationary pressures, it is very easy to see a scenario where rates remain on hold for an extended period.
Closer to home the Bank of England met yesterday for the Monetary Policy Committee (MPC) meeting. This came in the aftermath of the inflation data earlier in the week, which showed CPI in May unchanged from the corrected data for April at 3.4% year on year. The figure was in line with expectations. Services CPI eased from 5.4% in April to 4.7% in May. The Bank kept rates on hold at 4.25% but signalled a possible cut in August after recent data suggested the labour market was cooling. The Monetary Policy Committee vote was split, with a 6-3 decision in favour of a hold. Governor Andrew Bailey said, “interest rates remain on a gradual downward path”. The MPC predicted a “significant slowing” in wage growth, with Bailey noting that the Bank would pay careful attention to the impact on inflation from the weak labour market. The Bank reiterated existing guidance that it would take a “gradual and careful” approach to future rate reductions and policy was not on a pre-set path as it was closely watching “elevated” inflation expectations. But given the dovish tilt in the MPC vote, markets are pricing over 70% probability of a rate cut in August.
We continue to operate in very uncertain times but can take comfort from the resilience in financial markets, not only to the geopolitical risks but also to the persistent uncertainty as a result of the US tariffs regime, which will likely come into sharper focus as July’s deadline for negotiations approaches and there is no further escalation in the Middle East. History shows financial markets tend to cope well with geopolitical volatility provided any ‘shock’ is anticipated to cause a limited impact on the global economy. The backdrop is best described as ‘fluid’ though, and while our views remain constructive overall, we remain cognisant that after a strong recovery from the tariff induced market wobbles in the spring, any deterioration in risk appetite could trigger a pause or reversal in recent momentum.
Source: Columbia Threadneedle Investments as at 20 June 2025
