Oil Rebounds as US-Iran Peace Talks Hit Turbulence, Resetting Central Bank Rate Expectations and Pressuring Bond Markets Globally

Oil prices climbed on Tuesday after the US military conducted fresh strikes in southern Iran — described as defensive actions targeting missile launch sites and boats laying mines — just as markets had been growing cautiously optimistic about a peace deal. The strikes came while Iran's top negotiator and foreign minister were in Doha for talks with Qatar's prime minister on a potential agreement to end the three-month-old conflict. Both Washington and Tehran have since played down the prospect of an imminent breakthrough, prompting the dollar to regain safe-haven appeal (the tendency of investors to buy the US dollar during uncertainty as a perceived low-risk store of value) while equity markets turned mixed. The Strait of Hormuz reopening remains the key focus: Japan's Nikkei reported that any deal would include a plan to open the waterway approximately 30 days after hostilities end, though details remain thin. The sustained uncertainty is reshaping monetary policy expectations. Investors are now pricing in a 25-basis-point (hundredths of a percentage point) rate hike from the US Federal Reserve by December — a significant shift from two cuts that were priced in at the start of 2026. The European Central Bank and the Bank of England are also now seen tightening policy. In Sri Lanka, the central bank raised its benchmark rate by an outsized 100 basis points to stem inflation and currency pressure triggered by the Gulf crisis. The Bank of Japan has indicated Middle East developments will factor into its own rate-hike timing.

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