The US and Iran have signed a preliminary MoU outlining a ceasefire, some economic concessions and the reopening of the Strait of Hormuz, triggering market relief but marking only the start of negotiations rather than a final dealNow it’s official. Last night, US President Donald Trump signed the Memorandum of Understanding (MoU) between the US and Iran in Versailles. According to news reports, Iranian President Masoud Pezeshkian also signed the document on Wednesday.The MoU between the US and Iran outlines the terms of their ceasefire, the reopening of the Strait of Hormuz, some financial relief for Iran, and Tehran’s renewed pledge to never produce a nuclear weapon. Under the draft agreement, the US will allow Iran to sell its oil and petrochemical products, and Tehran may be able to tap into a US$300bn development fund if it meets commitments related to its nuclear programme in further negotiations. The document does not include specifics on what will become of Iran’s highly enriched uranium. With the signing of the MoU, a 60-day (though extendable) negotiation period starts, in order to flesh out further details.The relief in financial markets after the initial Sunday evening announcement was palpable – relief that a three-and-a-half-month war could be nearing its end. We will leave it to the real geopolitical analysts to decide whether the world has become a better place under the new deal compared with the situation in February. For now, it appears the MoU may have softened some of the red lines set by the US in the early stages of the conflict. What is clear, however, is the fact that the MoU is not yet a deal but rather the start of negotiations and the agreement to open the Strait of Hormuz during these negotiations. Whether these negotiations will eventually succeed is a different matter.On a different note, and at least for a short while, recent developments have brought the US and the rest of the G7 closer together. This week’s G7 meeting must have been one of the more harmonious meetings in recent times. But before getting overly enthusiastic about a new spring of multilateral relations, that harmony may simply reflect pragmatism: the US government needs some backing from Europe for the negotiations with Iran, and Europeans need some US backing for potential negotiations with Russia.So, the relief in financial markets should not be mistaken for a complete dissolution of geopolitical risks but rather as a reaction to the reopening of the Strait of Hormuz. Oil prices have dropped already, taking away some recent inflation fears. In our view, however, markets may be slightly too optimistic regarding the speed of the reopening. Mines will have to be discovered and removed, insurance premiums will have to be determined and vessels will actually have to be loaded and start passing through the Strait again. This will be a very gradual process. It should take several months before traffic in the Strait will be back to pre-war levels.With relief in oil markets, the recent wave of inflation will not stop abruptly, but it will be shorter-lived than assumed just a few weeks ago. For central banks, it could bring back the infamous word ’transitory’, giving central bankers even more of a headache in terms of whether to hike interest rates or not.Even though we released our last Monthly Update a week ago, the latest developments clearly call for an update of our forecasts. This is why we have developed new oil price scenarios based on those updated macro and market forecasts. The bottom line is that inflationary pressures will be slightly shorter-lived, the adverse impact of higher energy prices on growth will be more limited and central bankers will be more reluctant to hike aggressively, or to hike at all. Except, perhaps, for the European Central Bank, which has pushed itself into a corner, making it harder to wriggle out of a second rate hike. Some ECB officials might already regret the timing of the ECB’s meeting calendar….If the MoU really is the start of successful negotiations, we could eventually return to a macro world that we had actually expected at the start of this year: a gradually recovering global economy with risks of inflation undershooting and central bank rate cuts. An almost beautifully boring economic outlook, or is that wishful thinking?Our New Energy ScenariosSource: INGOur New Oil Price ScenariosBase case: This is it – we have a deal!A 60-day ceasefire is signed and both sides work towards a more permanent deal. This is difficult to reach given the sticking points. However, the US and Iran manage to agree a longer-term deal, even if it doesn’t fully address all the issues. As a result, blockades are lifted, allowing tankers to leave the Persian Gulf, although it will take time to remove mines from the water. The signing of the deal, however, gives shippers confidence to send vessels into the Persian Gulf, allowing for a quick recovery in flows through the Strait of Hormuz.A willingness for shippers to return to the Persian Gulf allows upstream production to return at a quicker pace. An easing in some Iranian sanctions means that Iranian exports bounce back, with exports eventually above pre-war levels.Scenario 2: 60-day negotiations get stuckThis scenario is essentially aligned with our previous base case. After the signing of the MoU, the negotiations get stuck, and we see some minor re-escalation as a result. Energy flows remain heavily constrained until the end of July. The market reaches an inflection point around this period, where prices spike higher due to increasingly tight stocks. These higher prices lead to renewed efforts to come to a deal which sees Strait of Hormuz oil flows resuming.Scenario 3: Re-escalationThe 60-day negotiations break off at some point, followed by significant re-escalation between the US and Iran. Strait of Hormuz flows remain heavily constrained due to attacks/strikes resurfacing. Iranian proxies get more involved. The Houthis disrupt Saudi Red Sea oil exports while the UAE’s Fujairah is targeted, along with regional energy infrastructure. Essentially, this heavily disrupts flows until at least year-end, with peak disruption over 3Q, a seasonally stronger period of demand. Prices need to spike higher to ensure adequate demand destruction to rebalance the oil market.Our Calls for Central BanksFederal Reserve: Despite a more hawkish Fed, we continue to think a prolonged pause is more likely than a rate hike. Our base case has inflation coming down to 3.6% in the fourth quarter and close to the 2% target by next summer. That’s on account of subdued wages, falling energy prices, fading tariff impacts and slowing housing inflation.European Central Bank: After last week’s decision, we still expect a second rate hike this summer, even with the fall in energy prices. Yet inflation is now set to peak lower and is likely to fall towards 3% in Q4 in our base case. Once it becomes clearer that there’s minimal sign of second-round effects, and in the absence of a pick-up in growth, we look for a single rate cut in mid-2026 to unwind some of the “insurance” provided by this summer’s tightening.Bank of England: The Iran deal has made the BoE’s life easier and a prolonged pause now looks likely. Inflation is set to peak around 3.5% and officials, on balance, seem to be more confident that second-round effects will be minimal. We agree and see a return to rate cuts in 2027.Our New ScenariosSource: INGRates: Balance of Risks Tilted Towards Higher Rates in the Near TermWell before this deal, US breakeven inflation rates had been falling. They are now back to where they were before the war started, which is quite remarkable (US 10yr breakeven at under 2.3%; a perfect score). US real yields are structurally higher by some 40bp since before the war, which, again, is quite remarkable. We doubt they collapse lower, which is why the 10yr yield will remain elevated. The 10-yr yield is holding in the 4.45% area, where it has tended to hover in recent weeks. The 10-yr real yield is just above 2%, which is broadly a neutral valuation, one that we saw before the GFC / pandemic-impacted years. Barring a recession, it can hold here.In the eurozone, the 10yr rate (take your pick of the German 10yr or Euribor) has dipped decisively below 3% as the agreement has crystallised. The big driver here is the fall in breakeven inflation, which is now down to 2% in the 10yr. It was previously at 2.4%. The juxtaposition here is between this and printed inflation in the 3% area (and still on the rise). Our gut feeling is that the 3% area is a logical staging post for the 10yr Euribor rate, while for the 10-yr Bund yield, it’s a range between 2.75% and 3% for the foreseeable.Oil continues to be an important driver for rates, which means we can still expect more volatility going forward. Having said that, markets have turned more hawkish on central bank expectations, which limits the downside if oil were to drift lower. For the ECB, we identify support of at least one more 25bp hike which markets seem reluctant to break. Markets are taking the view that the damage has been done in terms of inflation and the ECB does not seem to give any pushback to this notion.In effect, that means EUR 2Y rates will likely stay around current levels for longer or move higher if oil were to tick up again. Only later this year, when we get confirmation of benign second-round inflation effects, do we see more scope for 2Y rates to come down.In a re-escalation scenario, we continue to see significant upside risk for rates in the near term, but the endgame should bring rates lower. A surge in oil prices and geopolitical uncertainty would weigh on growth, forcing both the ECB and Fed into a more extended easing cycle. Therefore, once the initial inflation shock eases around mid 2027, we see rates coming down sharply across the curve on the back of recession risks.FX: Softer Energy Profile Should Limit Euro DownsideOur adjustment lower in baseline energy prices means we are modestly raising our EUR/USD profile. We now see it ending the year near 1.18. Of course, that runs against the current dominant narrative in FX markets, which is a more hawkish Fed. Our preferred scenario now sees EUR/USD pressured over the next couple of months near 1.14/15, but turning higher into year-end on our call that US data will not support Fed rate hikes.Currently, we are not looking for a sustained break below 1.14/15 because we doubt the market will price in more than 50bp of Fed tightening during what, after all, should be an adjustment in policy settings and not an outright tightening cycle.The alternative scenarios, with higher energy prices, remain more bearish for EUR/USD. Those lower levels look even more likely in an energy shock, now that we know the Fed is closer to tightening policy.Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read moreOriginal Post