Three forces – oil, interest rates and investment in artificial intelligence – are set to drive financial markets in the second half of the year. Oil prices have dropped from recent highs but remain volatile, particularly as tensions linked to Iran affect shipping through the Strait of Hormuz.
Lower oil prices, near USD 70 per barrel, would support a gradual economic rebound. However, renewed escalation could push prices higher again, feeding inflation and complicating central banks’ policy paths.
“The market has priced a meaningful Fed hawkish tail, but that can unwind if inflation does not re-accelerate”, said Jussi Hiljanen, Chief Strategist for fixed income and foreign exchange at SEB.
In the United States, the Federal Reserve is balancing persistent inflation against signs of softer momentum. Markets expect around 1.5 rate increases, but further tightening depends on whether inflation or labour market data surprise on the upside.
Bond markets reflect this uncertainty. Long-term US yields have moved above 4.50 per cent as oil prices rise and geopolitical risks intensify, although they are expected to remain within a relatively narrow range in the near term.
Europe more stable
In Europe, the picture is more stable but subdued. One additional European Central Bank rate increase is largely priced in, while weak growth and easing wage pressures limit the case for further tightening.
Currency markets remain sensitive to US developments. The euro’s performance against the dollar depends largely on whether US rate expectations continue to rise or begin to ease.
SEB’s strategists highlight two main scenarios for the coming months. In a base case, tensions ease, oil prices fall back, and inflation pressures moderate, allowing markets to unwind expectations of further US rate hikes. This would support a gradual recovery in the euro.
In a risk scenario, renewed supply disruptions push oil above USD 80 per barrel. That would strengthen inflation pressures, drive higher US rates and boost the dollar, putting further pressure on the euro.
Investors are closely watching oil prices, shipping activity through the Strait of Hormuz and upcoming inflation data, all seen as key indicators of whether markets stabilise or enter a period of renewed volatility.