Good morning. Markets are struggling to find direction as conflicting signals on the war in Iran leave traders rudderless. Vice President JD Vance yesterday postponed a trip to Pakistan after Iranian officials reportedly refused to meet with him, citing “unreasonable demands” from the US, while President Trump extended today’s ceasefire deadline to allow Tehran to present a “unified proposal,” even as he directed the Navy to maintain its blockade against Iranian shipping. At least two cargo vessels have been confirmed struck off the Iranian coast, with reports of a third attack in the last hour. Treasury yields are edging higher, crude is holding near yesterday’s close, equity futures are pointing to a modest paring of losses, and currencies are broadly rangebound, with the dollar little changed on the day.
Oil prices are still extremely elevated, but markets are growing less reactive to incoming headlines. Realised volatility in both the Brent and West Texas Intermediate benchmarks is retreating from its highs even as attacks on ships transiting the Strait of Hormuz continue, global supply shortages deepen, and diplomats admit the two sides are barely talking—let alone approaching a deal.
Foreign exchange markets are exhibiting similar dynamics, with domestic developments doing little to push the major pairs out of tight trading ranges. An as-expected acceleration in UK inflation failed to shift the pound’s direction this morning, the euro and yen are holding steady, and commodity-sensitive currencies like the Australian and Canadian dollars are making no material headway against the safe-haven Swiss franc or greenback. Measures of short-term implied volatility are subdued as the economic data calendar thins ahead of next week’s raft of central bank decisions.
This oddly-subdued backdrop may have less to do with the global battlefield than with the US ballot box. Trump’s approval ratings have slid to new lows since the war began, dragged down by voters’ fury over its economic fallout: rising gasoline costs, higher inflation, and the sense that there’s no plan for managing the second-order financial consequences. It is a familiar pattern, and one that reinforces what might be understood as the golden rule of modern geopolitics: America’s tolerance for economic pain is far lower than that of its adversaries. Markets, in other words, are not betting on peace—they’re betting Washington will blink first.
Yesterday’s Senate confirmation hearing for presumptive Fed chair Kevin Warsh delivered little in the way of new insight into the policy path ahead. Warsh told the committee he wouldn’t act as a “sock puppet” for Donald Trump and said “The president never asked me to predetermine, commit, fix, decide on any interest rate decision, in any of our discussions. Nor would I ever agree to do so”. “What the Fed needs is reform to its frameworks and reforms to its communications,” he warned, but offered little clarity on his model for understanding the economy or the drivers of inflation, largely sidestepping questions on why he had repeatedly misjudged the direction of both. His principal justification for looser policy was that “the supply side of the economy is changing dramatically”—a view unlikely to win over other committee members who tend to rely on incoming data in making decisions.
It could be months before there are any implications for the Fed’s policy trajectory. Senator Thom Tillis has said he will block Warsh’s nomination until the Justice Department ends its investigation into departing chair Jerome Powell, and Trump is showing no sign of backing down, telling CNBC yesterday that it was “possible” Powell personally took a cut of the money spent on the Fed’s renovation project, and rebuffing the host’s repeated attempts to suggest a compromise. For now, investors are pricing a neutral stance from the central bank this year, with the next rate cut not expected until late 2027—if one comes at all.
