Federal Reserve Rate Cut Likelihood Drops to 10.3% Amid Geopolitical Tensions

Traders are increasingly focusing on the possibility of a Federal Reserve rate cut in July, as geopolitical tensions escalate following recent U.S. strikes on Iran. The CME's FedWatch tool shows an 89.7% likelihood that the Federal Reserve will keep interest rates unchanged in July, with a 10.3% chance of a 25 basis point reduction. This shift in market sentiment is driven by slowing macroeconomic data and heightened geopolitical risks, prompting investors to seek safe-haven assets.

The recent U.S. strikes on Iran's main nuclear facilities have caused a sharp increase in crude oil prices, reflecting concerns over potential supply disruptions and broader regional escalation. This geopolitical uncertainty has led to a flight to safe-haven assets, with gold prices remaining stable despite a weaker dollar. The volatility in energy markets has also introduced fresh uncertainty across global equities and emerging-market currencies, as investors assess the potential impact on global supply chains and economic growth.

The Federal Reserve's policy stance has remained largely unchanged, with the central bank signaling two rate cuts for 2025. However, recent geopolitical developments have added complexity to the Fed's decision-making process. According to the analyst's forecast, if Brent settles above $85 per barrel for more than a week, at least one major central bank outside the Fed may pause or rethink its easing path before July is out. This highlights the delicate balance that central banks must maintain between addressing economic growth concerns and managing inflationary pressures.

In the cryptocurrency market, Bitcoin started the week above $106,000 and finished around $99,000, still well above its 50-day moving average. Ethereum fell to $2,181 alongside Bitcoin following the announcement of America attacking Iran. The geopolitical tensions have also impacted other cryptocurrencies, with Solana and Hyperliquid spiking early in the week, while DeFi token AERO surrendered its early gains. The regulatory environment for cryptocurrencies remains uncertain, with ongoing consultations in the EU and rumors of a spot-ETH ETF in the U.S. adding to the market's volatility.

Looking ahead, markets will be closely monitoring any signs of diplomatic de-escalation or further escalation in the Middle East. A significant disruption to Strait-of-Hormuz traffic could amplify the current oil rally and force central banks to balance growth worries against an energy-driven inflation bump. Conversely, any signs of diplomatic de-escalation may see risk assets regain lost ground, especially with quarter-end rebalancing flows in play. For nimble investors, the opportunity may lie in barbell positioning, holding quality defensives on one side and selective energy or commodity plays on the other, while keeping dry powder for a potential summer volatility spike.