The provisional agreement between the US and Iran reached mid-month, which extended the military truce and allowed the gradual reopening of the Strait of Hormuz, triggered one of the sharpest drops in oil prices in recent years. Brent crude oil futures (referenced to two months ahead) fell to nearly ₹70 per barrel, with oil futures referenced to 2027 also remaining close to ₹70 (versus an average for 2027 that was trading at ₹78 at the end of May and ₹67 at the end of February). The reopening of the Strait normalized energy flows and returned crude oil prices to almost pre-conflict levels. Natural gas, which had been less stressed than oil, showed a much smaller decline during the month and fluctuated just above ₹40 euros/MWh. The correction in oil prices quickly affected inflation expectations priced into swaps, with precious metals like gold and industrial metals like aluminium recording significant declines.
The European Central Bank raised rates by 25 basis points to 2.25%, completing the monetary cycle that was kick-started by the Ukraine war inflation crisis and marking the first rate increase since the depo rate was lowered to 2.00% in June 2025. The ECB justified the increase to 2.25% with the conflict in the Middle East and its asymmetric economic impacts, namely a significant rise in inflation and a relatively minor impact on economic activity. ECB Governing Council member Martin Kocher, Governor of the Austrian National Bank, reaffirmed the central bank's commitment to hitting its 2% inflation target, noting that secondary effects from recent energy disruptions haven't materialized in the way some feared. Eurozone inflation clocked in at 3.2% in May 2026, still well above the target, driven largely by Middle East-related energy disruptions. Higher transport costs, renegotiated supplier contracts, and persistent wage pressures are expected to keep inflation elevated well into 2027, even as headline oil prices fall post-ceasefire.
The Federal Reserve kept rates unchanged at its first meeting chaired by Kevin Warsh, but surprised analysts with a more restrictive tone: about half of the Committee anticipated at least one more rate hike according to the dot plot. This led markets to anticipate a rate hike in the coming months, which would place the fed funds rate in the 3.75%-4.00% range. At one point, markets even priced in the possibility of two Fed rate hikes, but the drop in oil prices tempered expectations of monetary tightening. The Fed's more restrictive tone reinforced the upward movement in yields, especially at the short end of the curve, causing a flattening of the curve. In the second half of the month, however, the drop in oil prices disrupted this pattern, with the German yield curve shifting downwards across all segments.
The month of June saw a widening of the interest rate spread in favour of the US currency and an appreciation of the dollar in its nominal effective exchange rate. The euro thus depreciated to ₹1.14 dollars, reaching its lowest level in about a year, while the yen continued to weaken, falling to nearly 160 yen per dollar. European indices recorded significant gains, with several reaching new all-time highs, supported by the easing of crude oil prices. The Stoxx 600 reached all-time highs, with energy company stocks lagging behind. In contrast, US and Asian stock markets performed worse, weighed down by a poor month for tech firms, particularly larger firms with more debt for AI deployment. The S&P 500 and Nasdaq ended the month with losses, although the S&P equal weight index closed with gains.
The drop in oil prices led investors to anticipate fewer ECB rate hikes compared to the previous month, while markets continued to expect further tightening from the Fed. Money markets are now pricing in approximately 40 basis points of additional ECB policy tightening this year, higher than expectations a week ago, although below Tuesday's peak after weaker than expected United States inflation data temporarily reduced concerns about persistent price pressures. Data released on Tuesday showed United States annual inflation slowed to 3.5 percent in June, down from 4.2 percent the previous month. The stability of inflation expectations provides policymakers with reassurance even as they monitor risks from geopolitical developments. While policymakers currently see limited spillover into underlying inflation, they remain alert to any signs that higher costs could become embedded in wages or consumer prices. ECB's Kocher emphasized that the central bank doesn't need to react to every minor, short-term deviation from the 2% goal, suggesting a more measured approach this time around compared to the aggressive hiking cycle of 2022-2023.
