Oil prices climbed on Tuesday as negotiations between the United States and Iran over a peace deal and the reopening of the Strait of Hormuz reached an impasse, adding to uncertainty across global markets and raising concerns over the inflation outlook.
Brent crude futures rose to $88.00 a barrel, while US crude futures reached $82.45, with both benchmarks hitting their highest levels since July 31. The move followed a roughly 5% rally in oil prices on Monday as investors assessed the prospects for an agreement that could restore normal passage through the crucial waterway.
US President Donald Trump responded on Monday to Iran’s conditions for a peace deal with demands of his own, including that Iran pay compensation for people killed in wars, attacks and protests. The escalation in rhetoric is expected to complicate efforts to reach an understanding over the reopening of the Strait of Hormuz, adding another layer of uncertainty for energy markets.
“We’re now in a bit of a Mexican standoff, if you’d like, in terms of who blinks first,” said Tony Sycamore, a market analyst at IG. He described the situation as potentially becoming “a war of attrition”, with oil prices possibly remaining within a $75-$95 range while markets wait for a breakthrough.
The renewed rise in energy prices comes ahead of the US July consumer price report due on Wednesday. Expectations are for a monthly increase of 0.1% in the headline reading and 0.2% in the core measure. A stronger-than-expected inflation reading could revive expectations of a Federal Reserve rate increase next month, with current market expectations described as roughly evenly balanced.
“We think the risks are skewed towards a hot print, which would probably drive a rebound in rate expectations and, potentially, renewed worries about stagflation,” said Jonas Goltermann, chief markets economist at Capital Economics. “Overall, our assessment remains that the U.S. economy is running a bit hotter than a ‘goldilocks’ situation. That points to higher interest rates.”
The prospect of higher energy costs and renewed inflation pressure was reflected across financial markets. Trading of cash US Treasuries was closed in Asia on Tuesday because of a holiday in Japan, while Treasury futures declined slightly, implying higher yields. In Australia, the Reserve Bank of Australia was due to announce its policy decision later on Tuesday, with expectations that it would leave interest rates unchanged.
Asian equities remained unsettled as investors weighed the latest developments in the Gulf alongside concerns about the wider inflation outlook. MSCI’s broadest index of Asia-Pacific shares outside Japan swung between gains and losses before rising 0.2%, while South Korea’s Kospi gained 0.3%. The latest escalation in Gulf hostilities kept sentiment fragile.
US equity futures were modestly higher, with Nasdaq futures up 0.28% and S&P 500 futures gaining 0.1%, after Wall Street ended lower on Monday. EUROSTOXX 50 futures slipped 0.05%, while FTSE and DAX futures were flat.
Investors were also monitoring developments in the technology sector. Nvidia said it had partnered with six major financial institutions to launch compute financing platforms aimed at raising more than $500 billion in third-party capital for artificial intelligence infrastructure. Sycamore questioned whether the scale of the financing boom could eventually carry risks reminiscent of the period when sub-prime mortgages became a mainstream financial product.
Currency markets were also affected by the shifting outlook. The yen remained weaker than 159 per dollar, well below last week’s high of 155.20 following several suspected rounds of intervention, including a joint intervention by Japan and the United States. Nomura analysts said markets were likely to remain alert to further joint US-Japan yen-buying intervention, making a move above 160 in the very near term appear unlikely.
The dollar received a marginal lift from the renewed rise in oil prices. The euro remained below a 1-1/2-month high at $1.1546, while sterling eased from Monday’s one-month peak to $1.3512. Elsewhere, spot gold rose 0.5% to $4,409.81 an ounce.
With the US-Iran negotiations stalled and the future of the Strait of Hormuz uncertain, investors face a combination of energy-market pressure, inflation risks and shifting expectations for interest rates. For now, markets remain focused on whether the diplomatic impasse can be broken before higher oil prices feed further into the global economic outlook.
