The core event driving markets is the improvement in global risk sentiment following reports that US President Donald Trump is willing to seek a peace agreement with Iran, even if the Strait of Hormuz remains largely closed. According to the Wall Street Journal, Trump has indicated a preference for diplomatic solutions and does not intend to extend the US military mission in the region beyond four to six weeks, which has been interpreted as a significant de-escalation in the Middle East conflict [2][3][4].
This development has had a notable impact on currency and commodity markets. The Pound Sterling outperformed its peers, rising 0.17% to near 1.3200 against the US Dollar during the European session, and was the strongest against the Canadian Dollar, up 0.35% [2]. The US Dollar Index (DXY) hit its highest level since May of the previous year, reflecting ongoing concerns about a prolonged energy price shock, but was capped below key resistance as risk appetite improved and US Treasury yields pulled back [1][4]. The USD/CHF pair extended its winning streak for a sixth day, rising 0.12% to trade near 0.8005, supported by both a stronger USD and a weaker Swiss Franc, the latter pressured by the Swiss National Bank's readiness to intervene against excessive CHF appreciation [3].
S&P 500 futures rose sharply, up around 1% and moving above the 6,400 level, signaling a strong rebound in investor risk appetite after several days of geopolitical concerns [2][3]. Oil prices corrected sharply lower as fears of supply disruptions eased, which in turn reduced expectations for energy-driven inflation and a more hawkish Federal Reserve [3]. Gold (XAU/USD) maintained a moderate bullish tone, trading at $4,556.93 and extending its recovery from last week's lows near $4,100, but remained capped below the $4,600 resistance area. The pullback in US Treasury yields and the Fed's dovish stance provided support for gold, while technical analysis suggests a possible move toward the $5,000 area if resistance levels are breached [4].
On the monetary policy front, Fed Chair Jerome Powell stated that the Fed is inclined to hold rates steady and look through the energy shock, emphasizing that inflationary pressures remain 'well anchored' despite higher energy prices [1][3][4]. Powell's comments triggered a correction lower in US yields, with the 2-year Treasury yield falling by around 20 basis points from its recent high above 4.00% [1]. Market participants have shifted to price in a higher likelihood of a rate cut rather than a hike by the Fed, while the Bank of England and European Central Bank are still expected to deliver multiple rate hikes, though ECB's Isabel Schnabel cautioned against overreacting to the energy shock [1].
Domestically, traders believe the Bank of England will not cut rates in the near term due to higher energy prices and de-anchored inflation expectations [2]. Meanwhile, the US Dollar remains supported by expectations that the Fed will not cut rates soon, although Powell's dovish tone has limited further USD gains [1][2][3].
CONCLUSION
Markets responded positively to President Trump's willingness to seek peace with Iran, easing geopolitical tensions and boosting risk assets globally. The Fed's cautious stance and lower US yields provided further support for equities and gold, while the US Dollar's rally paused below resistance. The outlook remains sensitive to developments in the Middle East and central bank policy signals.