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- The US and Iran signed a memorandum of understanding to halt the war in the Middle East and restart shipping in the Strait of Hormuz. Both President Trump and President Masoud Pezeshkian of Iran have signed the deal, which extends the ceasefire by sixty days to allow for further negotiations over Iran’s nuclear program and sanctions relief. The positive development resulted in further falls in the oil price, with Brent Crude trading almost 9% lower this week, to a current level of $79.74/barrel.
- A busy week for central banks. The US Federal Reserve (Fed) left interest rates unchanged for the fourth consecutive meeting, as expected, at 3.5%-3.75%. Treasury yields moved higher and US equities fell back on Fed projections that showed 9 out of 18 participants forecast at least one interest rate increase this year. New Chair Kevin Warsh said he did not submit a forecast. A much shorter post-meeting statement dropped previous dovish forward guidance and included a commitment to “deliver price stability”.
- The Bank of Japan voted 7-1 to raise interest rates by 25 basis points to 1%, the highest level since 1995. The accompanying statement said the Bank intended to continue the normalisation process, raising the policy rate and degree of monetary accommodation “in response to developments in economic activity and prices as well as financial conditions”.
- The Bank of England held interest rates at 3.75% as expected, in a 7-2 vote. Bank of England Governor Andrew Bailey said that while he was willing to temporarily tolerate above-target inflation, he would “respond promptly” to any signs of widening inflationary pressures. Bailey noted that recent falls in the oil price were “encouraging” but added that “whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline”.
- Andy Burnham secured almost 55% of the vote to win the UK Parliamentary by-election in Makerfield, setting him up to challenge Keir Starmer for the position of Labour party leader and Prime Minister. Burnham has toned down his language on the government’s finances, having previously said the government should not be “in hock” to the bond markets, and suggested looser fiscal policies. Burnham has now committed to keeping the fiscal rules of the current government. Attention now turns to the likely manoeuvring among the contenders to oust Keir Starmer over the coming days and weeks. An official revolt against a sitting Prime Minister has never happened in Labour’s 126-year history.
By the numbers
- 2.8% year on year (YoY) – the level of UK inflation (CPI) in May. Consensus expectations were for CPI to climb to 3%, but the Office for National Statistics said that upwards pressure from petrol prices and airfares had been offset by easing food inflation and a fall in the cost of domestic heating oil. Core CPI, which excludes food and energy, climbed to 2.6% YoY from 2.5% in April.
- £218 billion – the total value of M&A involving UK companies so far this year, up 88% on the same period in 2025, and the highest level since 2007. The Financial Times reports that overseas buyers are buying UK companies at a record pace, with the value of foreign acquisitions of UK companies year to date now totalling £128 billion, more than three times the level of the same period in 2025.
Market movers
While the policy moves, or otherwise, from the central banks this week were in line with expectations, the market mood on the rates outlook continues to evolve. The softer CPI data in the UK suggests that the inflation impulse from the Middle East war remains limited, though the household energy price cap increase in July will push inflation closer to 3.5%. With energy prices continuing to ease, the case for a UK rate hike continues to diminish and the Bank of England looks increasingly likely to stay on hold for the rest of this year. The story appears different in the US, where under new Chair Kevin Warsh, forward guidance has been scrapped, and there is scope for more ‘surprises’ not least given the strength of the US economy and persistence of inflation suggests that in contrast to President Trump’s demand for rate cuts, the Fed is moving towards rate hikes. Warsh made clear in his press conference his focus on fighting inflation, noting the 2% target had been missed for over five years. Market pricing for the Fed shifted significantly, with a September hike moving from 36% probability to 80%. Fed futures are now pricing of 38 basis points of hikes by year end; before the Middle East war, futures were pricing 60 basis points of cuts. Persistent inflation, a strong economy, and a more hawkish Fed chair than expected have significantly shifted the market view on the path for US rates.
The investment lens
- It is no surprise to see commodity prices falling as a result of the peace deal agreed between the US and Iran that allows the Strait of Hormuz to reopen after over three months of closure. The practicalities of reopening the Strait suggest a slow return towards normality, however, given there are mines in the main shipping lanes that will need to be cleared and shipping companies will have different levels of risk tolerance for navigating the chokepoint. Equally, while there is a large number of ships full of oil waiting to leave the Gulf, the transit of replacement vessels from around the world back into the Gulf, and the process of restarting production facilities does mean oil supplies may still see some volatility, and a ‘risk premium’ is likely to be built into commodity prices for the foreseeable future.
From a geopolitical perspective, much still needs to be done. The 14-point memorandum of understanding leaves much unresolved and the hard part in terms of nuclear negotiations for later. President Trump has already suggested hostilities will re-start should Iran not accept US demands over nuclear enrichment and enhanced uranium. This could be as little as a temporary deal to reopen the Strait of Hormuz or as much as the start of a process that will bring a more structured and sustained peace to the region. This was an ‘asymmetric’ conflict, with the US having miliary superiority but Iran holding the economic cards thanks to their closure of the Strait of Hormuz. The peace deal also looks somewhat one-sided, with significant concessions from the US in exchange for Iran reiterating previous commitments around nuclear development and reopening the Strait of Hormuz, which was already open before the conflict. Iran, meanwhile, has a regime that remains in place and will receive sanctions relief, the unfreezing of assets, the ability to export oil, a $300 billion reconstruction fund and has not had to make concessions on ballistic missiles or its support for regional militant groups.
The next sixty days will allow for a more comprehensive deal to be agreed, though this timescale can be extended. The previous nuclear deal with Iran under President Obama took two years to finalise, so there is scope for slippage. For financial markets however, assuming the Strait of Hormuz reopening proceeds as planned, the focus is set to move on, with the outlook significantly more benign than if the Strait had remained closed though the summer.
