During the week of May 18–22, 2026, market expectations were upended by rapid developments in U.S.-Iran relations. At the start of the week, the prevailing base case assigned a 45% probability to dollar consolidation, with a 35% chance of escalation following a UAE drone strike, and only a 10% likelihood of a ceasefire before Friday. By Tuesday, the probability of a hawkish FOMC minutes plus continued escalation scenario was also set at 45%, while the ceasefire scenario remained at just 10% [1].
However, on Wednesday, President Trump announced that the U.S. was in the 'final stages' of a deal with Iran. This statement triggered a sharp decline in oil prices and a significant rally in equities, reflecting market optimism about de-escalation in the region. By Thursday afternoon, headlines confirmed that a final draft agreement had been reached through Pakistani mediation, making the ceasefire scenario the new dominant narrative for the markets [1].
The market reaction was immediate and pronounced: oil prices dropped significantly on the news of a potential U.S.-Iran deal, while equities surged higher in response to the de-escalation and ceasefire prospects. The rapid shift in probabilities and market sentiment highlights the importance for traders to remain agile and responsive to headline-driven geopolitical developments [1].
Looking ahead, the article emphasizes the need for continued vigilance as further confirmation of the Iran deal could have ongoing impacts on oil, equity markets, and the U.S. dollar in the coming days [1].
CONCLUSION
The announcement of a near-final U.S.-Iran deal, mediated by Pakistan, led to a sharp drop in oil prices and a rally in equities. Market sentiment shifted rapidly from expectations of escalation to optimism about a ceasefire, underscoring the high impact of geopolitical headlines on financial markets.