Oil gaps lower as US-Iran attacks pause, but Hormuz remains closed. Central bank decisions loom. German Ifo rises for third month.
Alpha Score of 60 reflects moderate overall profile with strong momentum, poor value, weak quality, moderate sentiment.
Risk sentiment improved at the start of the week after the United States and Iran suspended military strikes over the weekend. Brent crude, which briefly traded above $100 last week, opened with a sharp downside gap and stabilized around $85. The retreat in oil prices eased immediate concerns about another inflation shock and helped revive demand for risk assets, traders said.
Asian equities rose, with the Nikkei closing 0.50% higher and the KOSPI up 0.97%. European markets extended the rally. The DAX outperformed, gaining more than 1.5%. US equity futures pointed to a strong open, with Dow futures advancing more than 500 points. The moves suggested investors were pricing in a scenario where the Middle East conflict stops short of a sustained regional war, analysts said.
Traders cautioned that the relief rally may be running ahead of developments. The US military halted strikes to give diplomatic efforts "some space," while Iran has similarly refrained from attacking regional targets. Diplomacy remains indirect, with Washington and Tehran communicating through intermediaries. That leaves considerable uncertainty over whether the pause can evolve into a durable ceasefire.
For financial markets, the key driver behind last week's surge in oil prices remains unresolved. Iran's Foreign Ministry spokesperson Esmail Baghaei reiterated Monday that "the situation in the Strait of Hormuz has not changed and it is still closed." Traffic through Hormuz continues to be severely disrupted. Attacks affecting shipping in the Red Sea have yet to normalize. The simultaneous disruption of both Gulf and Red Sea export routes poses a significant risk to global energy supply chains, shipping experts said.
Energy analysts drew a distinction between military de-escalation and physical supply normalization. Financial markets can remove geopolitical risk premium quickly once tensions appear to ease. Restoring shipping flows is a much slower process involving security assessments, insurance costs and the gradual return of commercial traffic. Unless meaningful progress is made toward reopening Hormuz, oil prices could regain some of the lost risk premium even if direct military confrontation remains paused.
Beyond geopolitics, markets now face a busy week for central banks. The Federal Reserve and the Bank of England will announce policy decisions within the next few days. The Bank of Japan will follow. Each is widely expected to leave interest rates unchanged, analysts said. The accompanying guidance could prove far more important.
The Fed carries the greatest uncertainty. Under Chair Kevin Warsh, the FOMC has shifted toward shorter policy statements and reduced forward guidance, placing greater emphasis on the voting pattern. Minutes from the previous meeting showed several officials had been prepared to vote for an immediate rate hike before agreeing to wait for more evidence. Markets will pay close attention to whether more policymakers formally dissent in favor of tighter policy, traders said.
The BoJ also retains considerable surprise potential. Recent media reports suggest policymakers are increasingly open to accelerating the pace of policy normalization from roughly one hike every six months to something closer to quarterly adjustments. Whether that shift materializes will depend heavily on the Bank's updated Outlook Report and whether revised inflation and growth forecasts justify a faster tightening cycle. At the BoE, the spotlight will fall on whether concerns over persistent inflation, previously highlighted by external MPC member Megan Greene and Chief Economist Huw Pill, begin to attract broader support within the Committee.
Currency markets reflected the cautious improvement in sentiment rather than the start of a new trend. The Swiss franc outperformed. Falling oil prices reduced pressure for additional global policy tightening, traders said. The Aussie found support from improved risk appetite ahead of this week's monthly CPI release. The Canadian dollar lagged as crude prices retreated. Yet despite these relative moves, almost every major currency pair and cross remained comfortably inside last week's trading ranges. That suggests investors are consolidating positions rather than establishing fresh directional trades, waiting for this week's central bank decisions and developments in the Middle East to determine the next major move. Forex market analysis
Three major central banks will announce policy decisions within 60 hours. USD/JPY stands out as the week's key market to watch. While both the Fed and BoJ are expected to hold rates, the Fed's voting split and the BoJ's updated Outlook Report could significantly reshape interest-rate expectations. With USD/JPY already at a 40-year high, even modest policy surprises could trigger outsized moves, traders said.
Germany's Ifo Business Climate Index rose to 86.6 in July from 85.7, marking a third consecutive monthly increase. Manufacturing, services, trade and construction all reported improving sentiment, although firms were slightly less satisfied with current business conditions. The survey suggests Germany's economy continues to stabilize, with expectations recovering faster than actual activity despite ongoing uncertainty in the Persian Gulf.
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