Cliff Notes: Middle East Conflict Seemingly at an Impasse

Key insights from the week that was.

Regarding the Middle East conflict, the week began with the expectation of a second round of in-person talks between the US and Iran. The start of the negotiations was initially pushed from Tuesday to Wednesday; but President Trump then announced on Truth Social that the meeting had been postponed at the request of Pakistani and Iranian officials to allow time for a “unified proposal” to be developed to be put to the US. Thankfully, having been stretched by both sides at the weekend, the expiring two-week ceasefire was extended indefinitely.

Since Wednesday, there has been no concrete evidence of progress towards a deal, the Iranians seemingly refusing to come to the table while the US’ blockade remains in place, and the US refusing to end the blockade until a deal is agreed. Both sides have halted and seized ships within their area of operations, but this has not triggered a ceasefire breach – although it must be noted that President Trump overnight ordered the US Navy to strike any vessel laying mines in the Strait of Hormuz, making clear the risk of further military conflict.

With no clear way out of the stalemate, or timeline for formal talks, the price of Brent oil has rebounded back to around USD106 having (very briefly) fallen as low as USD86 late last week. The longer the impasse persists, the greater the chance of a sustained period of high oil prices and refinery margins, with all costs eventually met by businesses and households across the world.

Central banks remain focused on the degree and persistence of price passthrough to domestic consumer inflation, the risk being that inflation persists well above target into 2027 on second-round effects and an uplift in inflation expectations. ECB President Lagarde this week noted that the staff currently view conditions in the Euro Area as between their baseline and adverse projections from the last meeting, and will act “as the situation demands” ahead. Next week’s run of central bank meetings across the northern hemisphere will provide a more detailed view on the balance of risks and the implications for monetary policy across the developed world.

In the US meanwhile, President Trump’s pick for the next FOMC Chair, Kevin Warsh, appeared before the Senate Banking Committee as part of the confirmation process. Warsh again made clear he believes several aspects of the FOMC’s communications and processes should change, but also showed a clear commitment to central bank independence. The next steps in Warsh’s confirmation remains highly uncertain, with Republican Senator Tillis refusing to approve the appointment at the Committee stage until the Department of Justice close their investigation into the Federal Reserve and Chair Powell. If Senator Tillis holds out until year end, the Administration may face an additional challenge in 2027 as their Senate majority is at risk in the mid-term election. Chair Powell will remain in place in the interim, giving the FOMC continuity and capacity to manage the US economy.

On data front this week, US retail sales rose 1.7% in March, beating expectations. The control group, which feeds into GDP, also surprised to the upside, 0.7%. For the quarter overall, however, the consumer pulse has been weak, and record-low confidence points to downside risks for Q2. The outlook for US business investment is also increasingly uncertain. Across the pond, the UK unemployment rate fell from 5.2% in January to 4.9% in February, though this reflected a decline in participation. Despite the softer labour market print, wages still rose 3.8%yr in February. A spike in energy prices also saw inflation rise 0.7% in March and 3.3% over the year. While the headlines focus on energy prices, sticky services inflation also remains an issue for the UK, 4.5%yr.

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