Global Markets Navigate Fed Policy and Corporate Earnings

The euro strengthened against the US dollar on Monday, supported by broad-based dollar weakness and easing fears of an immediate escalation in the Middle East.

Investor sentiment remained cautious amid shifting geopolitical developments involving Iran. Earlier reports suggested the United States was preparing to resume military action against Iran on Tuesday, helping push oil prices higher. However, market pressure eased after US President Donald Trump announced on Truth Social that he would delay any military action to allow for renewed negotiations.

The softer US dollar was also supported by declining Treasury yields. The benchmark 10-year US Treasury yield slipped 1 basis point to 4.585%, reversing part of Friday’s sharp rise that followed stronger-than-expected US inflation data. Recent consumer and producer inflation figures have reinforced expectations that the Federal Reserve may need to keep interest rates elevated for longer.

Chicago Fed President Austan Goolsbee maintained a hawkish stance on Monday, warning that inflation remains too high and should remain a key focus when Kevin Warsh assumes leadership of the Fed later this week. Goolsbee added that the US labor market remains stable and cautioned that premature rate cuts could reignite inflationary pressures.

Meanwhile, expectations for further tightening by the European Central Bank continued to support the euro. A Reuters poll indicated investors expect another ECB rate increase in June, with additional tightening possible as higher energy prices linked to Middle East tensions feed into core inflation across the eurozone.

Gold prices rebounded above the $4,550 level on Monday, recovering from a one-and-a-half-month low as a weaker US dollar provided support for the precious metal.

The recovery came as the US dollar softened against major currencies amid cautious optimism that diplomatic efforts could help ease tensions surrounding the conflict involving Iran. The weaker dollar increased the appeal of dollar-denominated commodities such as gold for overseas buyers.

Despite the rebound, gains in the precious metal may remain limited as rising energy prices linked to the Iran conflict continue to fuel inflation concerns globally. Investors increasingly expect the Federal Reserve to maintain a tighter monetary policy stance, reducing the attractiveness of non-yielding assets such as gold.

Higher oil prices have strengthened expectations that inflationary pressures could persist, reinforcing speculation that the Fed may keep interest rates elevated for longer or even consider additional tightening measures.

According to the CME FedWatch Tool, traders are currently pricing in a 35% probability that the Fed could raise interest rates by 25 basis points before the end of the year.

Oil prices rose on Monday as escalating concerns over supply disruptions linked to the Iran conflict outweighed reports of possible sanctions relief on Iranian crude exports.

Trading remained highly volatile throughout the session, driven by uncertainty surrounding geopolitical developments in the Middle East.

Market sentiment was initially supported by fears that the ongoing conflict involving Iran could continue to disrupt global energy supplies, particularly through the Strait of Hormuz, a critical shipping route that handles roughly 20% of the world’s oil supply.

After markets closed, oil prices pared some gains following comments from US President Donald Trump indicating that a planned military strike on Iran scheduled for Tuesday would be delayed to allow additional diplomatic discussions.

Meanwhile, reports emerged that the United States may be considering limited sanctions relief on Iranian oil exports during ongoing negotiations.

The head of the International Energy Agency, Fatih Birol, warned that global commercial oil inventories were being depleted rapidly due to the conflict and prolonged disruption to shipping routes. He noted that releases from strategic petroleum reserves had helped add approximately 2.5 million barrels per day to global supply, although such reserves were not unlimited.

Economic data from China also reflected the growing impact of elevated energy costs. Industrial activity slowed in April, while retail sales weakened to their lowest levels in more than three years.

Separately, the US Treasury announced it would extend a sanctions waiver allowing purchases of Russian seaborne oil for an additional 30 days to support countries facing energy shortages caused by disruptions in Gulf oil supplies.

Wall Street ended Monday’s trading session mixed after a volatile day marked by geopolitical uncertainty, fluctuating oil prices and concerns over rising bond yields, as investors monitored developments in negotiations between the United States and Iran.

Trading sentiment shifted repeatedly throughout the session as reports emerged that both Washington and Tehran had revised their proposals aimed at ending the ongoing conflict, although major differences between the two sides remain unresolved.

Technology stocks also came under pressure ahead of quarterly earnings from Nvidia later this week, a closely watched event seen as a key test for the artificial intelligence-driven rally that has helped propel US equities to record highs in recent months.

Attention also remained fixed on global bond markets after last week’s sharp sell-off pushed sovereign yields sharply higher across major economies. Investors have become increasingly concerned that rising oil prices and inflationary pressures could force central banks to maintain tighter monetary policy for longer.

Investors are also closely watching the leadership transition at the Fed, with Kevin Warsh expected to be sworn in as the next Fed chair later this week.

This week’s earnings calendar will be dominated by results from Nvidia, which investors view as a critical indicator of whether the artificial intelligence investment boom can continue supporting elevated equity valuations.

Retail earnings from companies including Walmart are also expected to provide fresh insight into the strength of US consumer spending amid rising economic uncertainty.