Oil prices surge 8%, dampening hopes for a June rate cut… Iran-Israel risk comes into focus

As tensions between the United States and Iran intensify and international oil prices jump, expectations for a June policy-rate cut by the Federal Reserve (Fed) are weakening. With the possibility of energy-driven inflation pressures resurfacing, markets are recalibrating the timing of monetary easing.

According to CoinCue, a media outlet specializing in virtual assets (cryptocurrencies), Brent crude has recently surged more than 8%, marking its highest level in months. Reports that tankers were damaged on key shipping routes are seen as having priced supply-disruption concerns and a geopolitical premium into crude.

Market participants say the latest oil spike is acting as a factor that lowers expectations for a June rate cut. Higher energy prices can lift the headline Consumer Price Index (CPI) through gasoline and transportation costs. While core inflation excludes energy, there are concerns that a prolonged rise in oil could influence broader inflation dynamics.

Fed Chair Jerome Powell has recently stressed a data-dependent approach, drawing a line against premature easing. In particular, energy-driven geopolitical risks are viewed as a factor that calls for caution in policy decisions.

John Faust, a former adviser to a Fed chair, described the Iran-Israel conflict as a "key variable" for the Fed and said expectations for a June cut could be pushed back to later in the year.

Market reactions have also been sensitive. Alongside the oil surge, pressure has increased across risk assets, while rate-sensitive sectors have come under correction as markets price in the possibility of "higher-for-longer" rates.

Still, scenarios remain open in both directions. If energy-led price pressures persist, the Fed is more likely to delay the timing of cuts. On the other hand, if a prolonged conflict translates into weaker consumption and employment and a demand shock materializes, some analysts say there is room for cuts to be brought forward to respond to slower growth.