An index for emerging-market currencies edged higher on Monday as traders weighed the interim peace deal between the US and Iran against uncertainty from the Federal Reserve's upcoming policy meeting. The deal, expected to be signed on Friday, would extend a ceasefire for two months and resume traffic along the waterway, whose closure sent oil prices surging and stoked fears over the global economy. Currencies from Chile and Poland — nations that rely on crude imports — were among the biggest gainers and jumped to a session high as Brent oil plunged below $80 per barrel following reports that the deal would allow Tehran to start selling oil immediately. The MSCI equity gauge gained for a third day, nearing a record level propelled by an advance in technology shares, with technology shares SK hynix Inc. and Taiwan Semiconductor Manufacturing Co. being the biggest contributors to the advance.
Traders and economists expect the Fed will keep interest rates on hold, but Kevin Warsh is caught between pressure from President Donald Trump to lower borrowing costs and inflation accelerating at the fastest pace in over three years. Under Warsh's tenure, the Fed is likely to overhaul its communication with the market as he's dropped hints that point toward less talk. As reported by Bloomberg, JPMorgan Chase & Co. strategists led by Anezka Christovova wrote that "an interim agreement reached between US and Iran is positive for EM assets, but the degree of Fed hawkishness is still a key constraint on broader portfolio changes." The excitement is starting to wane as traders turn cautious ahead of Warsh's first meeting as chairman of the Federal Reserve, with the decisions this week heavily influencing global market sentiment and borrowing costs in the coming months. The market has become split across the full policy map, with some betting cuts, some still betting hikes, and some strategists calling for three hikes, indicating the market does not have a clean macro story.
The oil move represents the real macro valve as Brent holding below $80 after a brutal four-session slide changes the conversation completely. A 15% drop in crude does not just hit energy screens but travels straight into the inflation narrative, then into bond markets, then into the Fed path, then into the dollar, then into gold. If expectations for Hormuz's reopening keep dragging the energy premium lower, the market will start stripping out the inflation shock it was only just beginning to price back in. Bonds are catching a bid and yields are leaning lower as the idea of more aggressive Fed tightening suddenly looks less clean than when crude was wearing a war premium. This creates a chain reaction where the oil collapse drains the inflation scare, supporting bonds and making the Fed's hawkish stance less defensible.
In Latin America, the Colombian peso rallied as local markets reopened following a Monday holiday, while the Brazilian real sank as a Tuesday poll showed President Luiz Inacio Lula da Silva beating conservative candidate Flavio Bolsonaro in a runoff. Mexico's peso was up 0.2%. In emerging Europe, Hungary's forint extended gains against the euro for a fourth day, with the rally potentially pushing the currency past 300 per euro as Hungary moves toward its planned accession to the common currency area. The forint traded around 350 per euro. Dollar bonds from Bolivia advanced as blockades in the country start to recede and after a local Treasury official told investors foreign-exchange rate unification and a deal with the International Monetary Fund are coming soon. Bolivian notes due in 2031 jumped 2.3 cents to 100.8 cents on the dollar.
The widening discrepancies in monetary policy paths are occurring amid increased volatility in global markets driven by constant changes in the outlook for the Middle East conflict and its impact on energy prices. The dollar is the tell and has not cracked despite lower oil, but a more dovish Fed tone could expose that resilience fast. The problem is that traders are now split across the full policy map, with some betting cuts, some still betting hikes, and some strategists calling for three hikes. Gold edging higher in this environment makes sense as it is no longer a screaming geopolitical rotation panic but quietly reconnecting the dots to rates and the dollar channel. The relief rally in risky assets is tempered by the approaching Fed meeting, with traders awaiting clarity on the central bank's stance amid the complex geopolitical landscape, where peace headlines are not the same as durable peace and lower crude is not the same as a solved inflation regime.
