Fed and Iran Talks Drive Markets (3–7 August)

Global markets entered August with investors reassessing the Federal Reserve’s policy outlook while renewed diplomatic efforts between the United States and Iran triggered sharp moves in oil and precious metals. The dollar recovered to around 100.3 but remained under pressure after posting its worst weekly decline in three months. Meanwhile, Brent crude fell more than 4% after President Donald Trump said peace talks with Iran would resume, easing immediate concerns over the Strait of Hormuz and energy-driven inflation.

The monetary policy outlook remains uncertain after the Federal Reserve kept rates unchanged for a fifth consecutive meeting. Three FOMC members favored a rate increase, keeping a September move under consideration, although Chair Kevin Warsh provided limited forward guidance. Markets continue to assign roughly two-thirds probability to a 25 basis point increase in September. At the same time, the Bank of England and Bank of Japan maintained restrictive policy positions, while renewed energy inflation kept global bond yields elevated.

Market Drivers & Catalysts

• Federal Reserve Uncertainty: The Fed kept its policy rate at 3.50%–3.75% for a fifth consecutive meeting. Three FOMC members dissented in favor of a hike, while markets continue to price roughly a 68% probability of a September increase.
• US-Iran Peace Talks: President Trump said negotiations with Iran would resume after Saudi Arabia and other US allies urged Washington to suspend planned military action. The renewed diplomatic effort pushed oil prices lower and eased near-term inflation concerns.
• Strait of Hormuz Developments: Trump repeated calls for the Strait of Hormuz to reopen. The prospect of improved shipping conditions reduced part of the geopolitical risk premium that had accumulated during July.
• Global Rate Pressure: Sticky inflation, cautious central banks, fiscal concerns, and elevated energy prices kept government bond yields near multi-year or multi-decade highs.
• Yen Intervention: Japan’s Finance Ministry confirmed a rare coordinated yen-buying operation with the US Treasury, pushing USD/JPY sharply lower as carry-trade positions were unwound.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield traded near 4.74%, close to its highest level since January 2025. The curve remained under pressure from a bear-steepening move driven by the Fed’s cautious hold, persistent inflation, and geopolitical safe-haven flows. Fresh US strikes on Iran had previously weakened hopes for a lasting truce and increased energy-related inflation concerns, while fiscal expansion risks continued to lift the term premium on long-duration debt.
• UK 10-Year Bond Yield: The UK 10-year gilt yield remained near 5.05%, holding close to a multi-month high after rising more than 23 basis points in July. The Bank of England maintained rates at 3.75% in a closer 6–3 vote, with three members supporting additional tightening. A roughly 20% increase in oil prices during July reinforced inflation concerns, although more stable UK political conditions provided some reassurance over fiscal discipline.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield traded near 2.81%, consolidating below its recent 30-year high of 2.91%. The Bank of Japan kept rates at 1.00%, while speculation continued over another increase in October. Ministry of Finance sales of US Treasuries to fund yen intervention also kept pressure on Japanese yields. Investors remained concerned about the debt implications of Prime Minister Takaichi’s ¥370 trillion spending plan.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield traded near 2.94%, close to a multi-month high. Sticky Eurozone inflation, a cautious European Central Bank, and higher global yields kept borrowing costs elevated. The Italy-Germany yield spread remained stable at 134 basis points, indicating limited concern over contagion in peripheral bond markets. Energy-related inflation risks continued to outweigh the Bund’s usual safe-haven appeal.

Commodities

Gold rose above $4,050 per ounce, recovering earlier losses after Trump announced that peace talks with Iran would resume. The announcement pushed oil prices lower and reduced immediate inflation concerns. Trump said Saudi Arabia and other allies had encouraged the United States to suspend planned attacks in favor of diplomacy, while he again called for the Strait of Hormuz to reopen. Investors are now focused on a busy US labor market calendar, culminating in Friday’s employment report. The Fed kept rates unchanged with three dissenting votes, while markets place the probability of a September increase at around 68%.

Silver climbed above $58 per ounce, recovering earlier losses as renewed Iran peace talks drove oil prices lower and eased inflation concerns. The precious metal also found support from uncertainty around Federal Reserve policy. The Fed left rates unchanged with three dissents, while markets continue to price a 68% chance of a September increase.

Currencies

• U.S. Dollar Index (DXY): The dollar index rebounded to around 100.3, although it remained down nearly 1.5% for the week, its weakest weekly performance in three months. The index also declined 1.3% over the month as investors questioned the Fed’s willingness to tighten policy aggressively. The Fed kept rates unchanged for a fifth meeting, while Warsh offered limited guidance. Markets still assign roughly two-thirds probability to a 25 basis point increase in September.
• Euro: EUR/USD traded near 1.1539, consolidating after rebounding from late-July lows. A less aggressive Federal Reserve outlook and firm Eurozone inflation reduced downward pressure on the currency, although widening rate differentials and continued Middle East uncertainty supported dollar demand. The Relative Strength Index remained neutral near 50. Resistance stood between 1.1550 and 1.1580, while support was located around 1.1450 to 1.1400.
• British Pound: GBP/USD traded near 1.3484, maintaining a bullish bias after a three-day rally at the end of July. The Bank of England’s hawkish hold supported sterling, with rates maintained at 3.75% while policymakers highlighted persistent core inflation. Softer US growth figures also limited dollar demand. The Relative Strength Index stood near 63.5, indicating active buying momentum, although August has historically been a weak month for GBP/USD.
• Japanese Yen: USD/JPY fell sharply to around 156.35 after Japan’s Finance Ministry confirmed a rare coordinated yen-buying intervention with the US Treasury. Cooling US data and hawkish comments from Japanese policymakers narrowed yield differentials and strengthened the yen. The pair tested support around 156.00 to 155.80, while the Relative Strength Index showed strong bearish momentum as leveraged carry-trade positions were reduced.

Economic Data Highlights

• Federal Reserve Interest Rate Decision: The Federal Reserve kept its target rate unchanged at 3.50%–3.75% for a fifth consecutive meeting. The decision matched expectations despite markets assigning roughly a one-in-three probability to a hike before the meeting. Three FOMC members dissented and supported an increase, keeping September in play. Policymakers cited solid economic activity, strong productivity and investment, continued employment gains, and elevated inflation partly linked to energy supply disruptions.
• Bank of Japan Interest Rate Decision: The Bank of Japan maintained its policy rate at 1.0%, leaving borrowing costs at their highest level since 1995 after a 25 basis point increase in June. The decision passed by an 8–1 vote, with board member Takata favoring an increase to 1.25%. The BOJ lowered its fiscal 2026 inflation forecast to 2.5% from 2.8%, reflecting the effect of energy subsidies, while raising its GDP growth forecast to 0.6%. Forecasts for fiscal 2027 inflation and economic growth were increased to 2.4% and 0.8%, respectively.
• Eurozone Inflation: Annual Eurozone inflation accelerated to 2.9% in July, matching forecasts and rising from 2.8%. Inflation remained above the ECB’s 2% target as renewed US-Iran hostilities lifted energy prices. Energy inflation increased to 10.0% from 8.5%, while services and industrial goods inflation also strengthened. Food inflation eased, but core inflation rose to 2.5% from 2.4%. Inflation accelerated in Germany, France, Spain, and the Netherlands, while easing slightly in Italy.
• US GDP Growth: The US economy expanded at an annualized rate of 1.5% in the second quarter, below the first quarter’s 2.1% pace and weaker than forecasts. Nonresidential fixed investment slowed, while investment in structures contracted for a tenth consecutive quarter. Equipment investment remained strong, and residential investment increased for the first time in six quarters. Net trade made a larger negative contribution as export growth slowed, while government spending declined following Strategic Petroleum Reserve sales. Consumer spending accelerated sharply, led by prescription medicines, trucks, furniture, and food services.

Macro Calendar Highlights

• US ISM Manufacturing PMI
• ISM Manufacturing Prices
• US JOLTS Job Openings
• Factory Orders
• US ADP Nonfarm Employment Change
• S&P Global Services PMI
• ISM Services PMI
• Crude Oil Inventories
• US Initial Jobless Claims
• UK Construction PMI
• US Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings