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WTI crude briefly slipped below the $90 mark as a fresh wave of diplomatic optimism swept energy markets, after US President Donald Trump signaled that a second round of talks in Islamabad could take place “over the next two days,” according to the New York Post. The move reflects a rapid unwind of the war premium, with markets increasingly anticipating that the next meeting could deliver a ceasefire extension—or even a “bridge deal” that charts a path toward de-escalation.

The next 48 hours are critical. With the ceasefire expiring in just one week, this second round of talks is seen as decisive. Without progress, markets risk snapping back into escalation mode. But for now, the bias is toward a negotiated extension.

Crucially, traders are not betting on a full resolution yet, but on a “bridge deal.” The working assumption is that both sides will compromise on the uranium enrichment dispute, splitting the gap between Washington’s proposed 20-year freeze and Tehran’s 5-year counteroffer.

At the same time, the reality of the Hormuz situation is being reassessed. Despite strong rhetoric, the blockade has not resulted in a full disruption of global supply. Instead, it is being viewed as a calibrated tool—one that increases pressure without triggering immediate escalation.

Another factor supporting optimism is the role of Pakistan’s Field Marshal Asim Munir. Trump’s explicit praise of Munir has reinforced the perception that the next round of talks could be more structured and outcome-oriented. his has helped reinforce confidence that a technical compromise is achievable.

If a bridge deal materializes—potentially alongside a 45-day ceasefire extension—the implication is clear: oil moves lower. Such an outcome would significantly reduce the probability of supply disruption, allowing WTI to drift toward the $80 level. Importantly, $80 is not “peace pricing,” but rather reduced war premium pricing.

Technically, WTI crude's fall from 117.90 resumed by breaking through 91.36, but halted just before 50% retracement of 54.98 to 119.45 at 87.21. Further decline is in favor in the near term as long as 55 4H EMA (now at 99.52) holds. Firm break of 87.21 will pave the way to 80, which is slightly above 61.8% retracement at 79.60, 100% projection of 117.90 to 91.36 from 105.77 at 79.23

ECB President Christine Lagarde pushed back against rising market expectations for near-term rate hikes, signaling caution despite the energy shock from the Middle East conflict. Investors have increasingly priced the risk of tightening as the closure of the Strait of Hormuz drives fuel costs higher in the energy-importing Eurozone, but Lagarde made clear it is too early to draw firm policy conclusions.

Speaking to Bloomberg TV, Lagarde emphasized the high level of uncertainty and rejected attempts to lock in a policy path. “It doesn't predicate that we'll go in one direction or the other,” she said, adding that the current situation “certainly does not determine a rate path” at this stage. She also cautioned against overconfidence, noting that colleagues predicting a specific outcome “don't know, honestly.”

The ECB’s latest projections underscore the dilemma. While the baseline assumes the impact of the Iran war will be short-lived, alternative scenarios point to more persistent risks. In the adverse case, higher energy prices and broader spillovers could push inflation significantly higher, with the most extreme scenario seeing inflation reach 4.8% next year. Lagarde said the economy is currently “between the baseline and the adverse”.

The IMF has warned that the global economy faces a more prolonged and damaging shock if the Middle East conflict escalates, with oil prices potentially averaging as high as $125 in 2027 under a severe scenario. Crucially, this is not a short-lived spike but a sustained high-price environment, implying persistent inflation pressure and a more challenging policy backdrop.

Under its baseline assumption that the conflict remains limited, the IMF projects global growth to slow to 3.1% in 2026 before edging up to 3.2% in 2027. Inflation is expected to rise modestly in 2026 due to energy costs before resuming its decline. However, even this relatively benign scenario points to a fragile balance between slowing growth and lingering price pressures.

The severe scenario paints a much more concerning picture. Oil prices are projected to double relative to earlier assumptions and remain elevated, averaging around $110 in 2026 and $125 in 2027. At the same time, global headline inflation could climb to 5.8% in 2026 and exceed 6% in 2027, reflecting both higher energy costs and a rise in inflation expectations.

That rise in expectations is a key transmission channel. The IMF estimates that one-year-ahead inflation expectations could increase by up to 100 basis points in advanced economies and 130 basis points in emerging markets. This would reinforce price pressures and make it more difficult for central banks to bring inflation back under control.

Financial conditions would also tighten significantly. The IMF warned of a broad risk-off episode, with corporate credit spreads in advanced economies and China widening by around 100 basis points, while emerging markets could see sovereign spreads rise by a similar magnitude and corporate spreads by as much as 200 basis points.

Importantly, policy responses in such a scenario would be constrained. Rather than supporting growth, central banks would be forced to focus on containing inflation, even as activity weakens. This creates a classic stagflationary setup, where tightening financial conditions and elevated borrowing costs further weigh on economic momentum.

Even in the IMF’s adverse scenario, growth slows meaningfully to 2.5% in 2026, with oil averaging around $100 and inflation rising to 5.4%. This underscores that risks are already skewed to the downside, even without a full escalation.

Full IMF World Economic Outlook release here.