The prolonged stalemate in the Middle East conflict, coupled with cooling US employment and inflation pressures, is reshaping the global monetary policy outlook, with Standard Chartered expecting the Federal Reserve to keep interest rates unchanged through the end of the year.
In a commentary by Jonathan Liang, CFA, Standard Chartered said the Middle East conflict appeared to have entered a prolonged stalemate, with neither side showing a willingness to soften its position.
Iran continues to insist on retaining a role in managing shipping traffic through the Strait of Hormuz, while US President Donald Trump has asserted that the United States has “total control” of the waterway and highlighted the effectiveness of the US naval blockade.
Pakistan’s foreign ministry has also indicated that the broader peace process has stalled.
Standard Chartered said the impasse was keeping geopolitical risk premiums elevated, particularly in energy markets. However, recent developments suggested signs of “significant warfare fatigue” on both sides.
While energy prices are expected to remain volatile, the bank said oil prices returning to the levels seen during March and April appeared unlikely, a development that should help contain inflation.
European natural gas prices, however, have remained close to the highs recorded during the opening months of the conflict, potentially complicating monetary policy decisions in the euro area.
Cooling US Inflation, Employment
In the US, July inflation and employment data pointed to further moderation in aggregate economic activity, although artificial intelligence-related capital expenditure continued to show little sign of slowing.
Headline consumer price inflation eased to 3.4% year-on-year, while core inflation declined to 2.5%, its lowest level since 2021, according to Standard Chartered.
At the same time, US non-farm payrolls unexpectedly contracted by 23,000, while employment gains for May and June were revised lower.
The combination of softer inflation and weaker hiring suggests that the stronger momentum in job creation seen during the spring has faded, the bank said.
This gives the Federal Reserve greater flexibility to remain patient on monetary policy.
Although policymakers continue to face pressure to raise rates, given inflation has remained above target for several years, Standard Chartered said the direction of travel suggested those pressures were easing.
The bank therefore maintained its base case that the Fed will leave interest rates unchanged through year-end.
The softer economic backdrop should limit upward pressure on US government bond yields at the short-to-intermediate end of the curve, although uncertainty over the US fiscal outlook could continue to keep longer-term yields elevated.
ECB, BoJ Face Tightening Pressure
The European Central Bank faces a more difficult policy trade-off as elevated natural gas prices increase the risk that higher energy costs could feed into headline inflation and inflation expectations.
As an inflation-targeting central bank, the ECB may feel compelled to tighten monetary policy further despite fragile regional growth.
Standard Chartered expects the ECB to deliver one additional interest rate hike before the end of the year.
The Bank of Japan is also facing pressure to tighten monetary policy, with negative real interest rates and a still-wide interest-rate differential between Japan and the US continuing to weigh on the yen.
Despite earlier coordinated intervention by the US and Japan, currency weakness could fuel imported inflation and undermine the durability of intervention unless supported by faster monetary policy normalisation.
Standard Chartered therefore expects the BoJ to raise rates once more before year-end.
US Equities Continue To Benefit
Meanwhile, US equities continue to benefit from a combination of moderating bond yields and resilient corporate earnings.
Standard Chartered said softer economic data had reduced pressure on bond yields, while corporate earnings remained healthy, allowing US equities to generate positive returns despite persistent geopolitical uncertainty.
Market leadership is also beginning to broaden beyond the largest technology companies.
The bank said it had recently added investment ideas aimed at improving portfolio diversification while maintaining exposure to durable structural and cyclical themes.
These include Global Power & Electrification, supported by rising electricity demand, grid investment and infrastructure modernisation, as well as US Financials, which are expected to benefit from continued strength in capital markets activity.
Overall, Standard Chartered said the combination of cooling US inflation and employment, evolving central bank policy expectations and resilient corporate earnings would remain key drivers of global markets amid elevated geopolitical risks.
