Market Brief: Oil prices resume climb, inflation fears stalk global bond markets

Oil prices are holding yesterday's gains and the dollar is advancing on reports suggesting that the Trump administration is considering rebranding* its war with Iran as “Operation Sledgehammer” should Tehran reject US demands and the current ceasefire collapse. According to multiple sources, President Trump is weighing a resumption of major combat operations after declaring an end to “Operation Epic Fury” when a ceasefire took effect in early April, with the expectation that a new designation would reset the 60-day legal clock requiring congressional authorisation for hostilities. Intelligence assessments publicised by the New York Times** suggest Iran retains roughly 70% of its pre-war missile stockpile and mobile launchers, with access to most of its launch sites on the Strait of Hormuz intact—indicating the regime can maintain its grip on oil supplies for a prolonged period. The global Brent benchmark is trading at $108 a barrel, while West Texas Intermediate holds at a still-elevated $102.

The International Energy Agency warned this morning that global oil supply will fall far short of demand this year, as the US-Israel war with Iran knocks more than 14 million barrels per day offline, marking the largest supply disruption in history. The agency is now forecasting a deficit of 1.78 million barrels per day for 2026, a dramatic reversal from the surplus it had projected just months ago, with the second-quarter shortfall alone expected to reach a huge 6 million barrels a day. Demand is also weakening, with consumption expected to fall by 420,000 barrels per day this year as high prices and growing shortages crimp global economic growth.

Yesterday's US data confirmed that war-led inflation outpaced wage gains last month, increasing the strain on already-stretched households. With gasoline soaring, food costs rising, and price pressures intensifying across the economy, inflation-adjusted average hourly earnings fell for the first time in three years in April, forcing consumers to draw on savings—or debt—to sustain current spending. Today's producer price index is expected to reveal similar dynamics across supply chains, with a decline in portfolio management fees tied to March's market sell-off insufficient to offset rising core manufacturing input and transportation costs.

Rising inflation expectations are dragging government bond yields higher across the major advanced economies. With a war-driven jump in energy costs feeding directly into breakeven inflation rates and convincing markets that central bankers will have little room to cut rates while oil-related price pressures persist, traders are pricing in a higher-for-longer trajectory from most central banks, without a lot to distinguish between them. This broad-based sell-off in sovereign debt has left rate differentials surprisingly stable, removing a key catalyst for exchange rate movement.

Against this backdrop, there is still no sign of disorderly moves in currency markets, even in the UK, where borrowing costs have risen to their highest levels since 2008. Prime Minister Keir Starmer is fighting for his political survival after last week's devastating local elections and looks set to face a leadership challenge from health and social care secretary Wes Streeting in the coming days. It’s difficult to tell who might emerge victorious***, but Streeting is considered a relative centrist, unlikely to dramatically increase spending or government borrowing. The pound is oscillating around $1.35, down just 0.6% over the past five days, while other major currency pairs are firmly range-bound, with implied volatility levels remaining well below historical averages.

Today's meeting between Donald Trump and Xi Jinping is unlikely to represent a major volatility catalyst. Beijing may announce purchases of American agricultural, energy, and aerospace products and make investment pledges, but these will be designed to impress rather than to shift fundamentals—past agreements have involved goods already in the pipeline or have simply not been followed through on. A fragile ceasefire on trade will be kept in place, and deeper imbalances left unchallenged.

For currencies such as the euro, Canadian dollar, Mexican peso, and Japanese yen, near-term price dynamics look more likely to be shaped by events in the Middle East than by domestic fundamentals. A prolonged period of range-bound trading could be broken suddenly and violently by shifts in the conflict—and those shifts could come without warning. This argues for greater use of market orders and options in hedging programmes.

*Kudos to the 16-year old boy tasked with coming up with these names.

**Israeli assessments appear to have reached similar conclusions.

***Winston Churchill once said "Kremlin political intrigues are comparable to a bulldog fight under a rug. An outsider only hears the growling, and when he sees the bones fly out from beneath it is obvious who won". Modern British politics work along the same lines, but involve Pomeranians who come out with their hair slightly out of place.

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Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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