US-Iran deal: reasons to remain cautious
Amid a mooted US-Iran peace deal, markets are pricing a reduction in risk, not its removal – leaving the macro outlook more resilient, but still fragile.
Following repeated premature announcements, the US and Iran have now agreed a 60-day ceasefire extension, including an immediate reopening of the Strait of Hormuz. While key elements – including sanctions relief and commitments around Iran’s nuclear programme – have been signalled, details remain incomplete and subject to further negotiation.
The risk that the latest announcement proves premature again remains significant:
- Key details – such as the scope and timing of sanctions relief or the precise definition of “free passage” through the Strait – may not yet be fully agreed.
- Third parties, including Israel or US allies in the Gulf region, may not support the current framework.
- Even if an agreement is ultimately reached, implementation risks remain high, potentially leaving regional security more fragile than before the conflict.
At around USD 83 a barrel on the morning after the announcement, Brent crude remains roughly one-third above early-2026 levels, with futures still around USD 80 by year-end.
These elevated levels likely reflect a mix of lingering supply disruption due to war-related damage, temporary excess demand from inventory rebuilding, and a persistent risk premium linked to the Strait of Hormuz.
That said, if supply resumes and oil prices stay at these levels, risks to global growth should ease. Business and consumer confidence may recover, allowing focus to shift back to supportive drivers such as continued AI investment and the gradual absorption of last year’s tariff shock. Oil importers in Europe and Asia would likely benefit more from improved sentiment than exporters, including the US.
Reflation risks remain as the shock fades
Even if lower oil prices reduce the immediate inflation impulse, the risk of further central bank tightening should decline, potentially reopening discussions around rate cuts in economies such as the US and the UK. However, oil prices are still high enough to keep inflation well above target in most major economies, while any recovery in demand may tilt the outlook towards a reflationary rather than a “Goldilocks” (steady growth, low inflation) environment. The European Central Bank noted last week that its rate hike to 2.25% was “robust” even in scenarios of rapid and sustained Middle East deescalation. This week, the US Federal Reserve and other central banks are holding scheduled meetings and may comment on the deal’s implications.
A relief rally in risk markets seems likely, but may prove limited by these factors. Markets are pricing a reduction in risk, not its removal. The reflationary environment continues to challenge bond markets, while ongoing risks still support a relatively resilient US dollar against the euro and other currencies.
