A preliminary peace agreement between the United States and Iran has been announced, with an official signing ceremony scheduled for Friday in Switzerland, according to statements from US President Donald Trump and Pakistan Prime Minister Shehbaz Sharif [6][1][2]. The deal includes the reopening of the Strait of Hormuz, which has led to a sharp decline in oil prices, with US crude falling by 5% [2][6]. The ceasefire, in place since April, will be extended to allow further talks, and Iranian officials have confirmed the existence of a negotiation framework expected to be finalized in the coming days [2].
The announcement has triggered a risk-on sentiment across global markets. S&P 500 futures rose by almost 1.3%, and US equity index futures climbed between 1% and 2% during the European session [1][2]. The US Dollar Index (DXY) dropped around 0.3% to near 99.50, reflecting reduced demand for safe-haven assets [2][3]. MUFG’s Lee Hardman notes that the US Dollar has continued to weaken, with the deal expected to encourage a further reversal of gains recorded during the conflict, especially if the Federal Reserve under Kevin Warsh keeps rates on hold and avoids a hawkish surprise [3]. US Treasury yields also fell, with the 10-year note down over 4 basis points to 4.441%, the 2-year note down over 5 basis points to 4.035%, and the 30-year bond down 3 basis points to 4.942% [6].
Risk-sensitive currencies benefited from the improved sentiment. The Australian Dollar (AUD) advanced, trading around 0.7070, up 0.35% on the day, and was the strongest against the US Dollar [2]. The Euro also gained, trading between 1.1569 and 1.1622 overnight, supported by lower oil prices and the US–Iran memorandum of understanding [5]. The Japanese Yen, however, underperformed against its peers, trading marginally lower at around 160.15 against the US Dollar, despite expectations of a 25 basis point Bank of Japan (BoJ) rate hike to 1% on Tuesday [1][4]. Societe Generale highlighted that speculative short Yen positioning has reached multi-year highs, keeping the Yen under pressure, and market focus remains on narrowing the 2-year UST/JGB spread to ease intervention pressure [4].
Market participants have scaled back expectations for further tightening by the Federal Reserve, as concerns about an inflationary shock linked to the Middle East conflict have eased following the agreement announcement [2][3][6]. CME's FedWatch tool indicates a more than 98% chance that the upcoming Federal Reserve meeting will end with rates unchanged [6]. Analysts at Nomura Securities commented that the BoJ does not want to get ahead of government policy, especially as Japan faces risks from higher energy prices and plans to loosen fiscal policy to provide relief from inflation [1]. Investors are also watching for economic data on housing and retail sales, as well as the Reserve Bank of Australia’s policy decision, which is widely expected to leave its cash rate unchanged at 4.35% [2][6].
Forward-looking statements from analysts suggest that the US Dollar and yields could fall further if the Fed avoids a hawkish surprise, but caution remains ahead of the FOMC meeting [3][6]. Societe Generale notes that the stakes are high for USD/JPY, with support at 159 and resistance at 161.20, and sizeable option strikes around 1.1500–80 and 1.1600–60 for EUR/USD could influence short-term price action [4][5].
CONCLUSION
The US-Iran peace framework has significantly boosted risk appetite, driving equities higher, oil prices lower, and weakening the US Dollar. Safe-haven assets like the Japanese Yen have underperformed, while risk-sensitive currencies such as the Australian Dollar and Euro have rallied. With central banks expected to hold rates steady, markets are now focused on upcoming policy meetings and economic data for further direction.