Financial markets surged on optimism that the conflict in the Middle East may soon de-escalate, following explicit statements from US President Donald Trump and Iranian President Masoud Pezeshkian. Trump announced that the US intends to leave Iran within two or three weeks, regardless of whether a deal is reached, and scheduled an important address to the nation for Thursday at 01:00 GMT to provide further updates on Iran [1][2][5][6]. Iranian President Pezeshkian confirmed Iran's willingness to end the conflict, provided essential guarantees are met to prevent future aggression [1][5].
This shift in geopolitical sentiment triggered a broad risk-on rally across global markets. The S&P 500 posted its best daily gain since May last year, rising by 2.91%, with the NASDAQ up 3.83% and the Mag-7 tech stocks surging 4.48%. The S&P 500 airlines sector rebounded by 5.77%, and market breadth was strong with 421 advancers, the most year-to-date. Volatility dropped sharply, as the VIX index fell by 5.36 points to 25.25, marking its largest daily decline since last April [3]. Wall Street's positive momentum continued into Wednesday, with US stock index futures up between 0.7% and 1% [1].
Currency markets reflected the risk-on mood, with the US Dollar weakening against major peers. The USD Index (DXY) lost about 0.6% on Tuesday and traded 0.15% lower near 99.70 on Wednesday, after hitting a 10-month high of 100.65 the previous day [1][5]. GBP/USD rallied to the 1.3300 neighborhood, a fresh weekly high, driven by USD selling and improved risk sentiment [2]. EUR/USD rebounded above 1.15, supported by lower global yields and sharply lower energy prices, as well as euro area inflation data showing a rise to 2.5% year-on-year in March, mainly due to energy [4]. The Swiss Franc outperformed, with USD/CHF slumping to near 0.7960, down 0.35% [5]. USD/CAD hesitated at 1.3900, with oil prices retreating nearly 5% over two days, posing headwinds for CAD recovery [6].
On the policy front, ECB officials expressed vigilance regarding inflationary risks and the potential for monetary policy adjustments in response to the Iran conflict and elevated energy prices. While some officials indicated rates may rise in coming quarters, others emphasized a cautious, meeting-by-meeting approach [4]. Investors are also awaiting key US macroeconomic data, including ADP Employment Change, ISM Manufacturing PMI, and Retail Sales, which could influence expectations for Federal Reserve policy [1][5][6].
Despite the optimism, some caution remains. The US has reportedly hit targets near Isfahan, Israel has reported missile launches from Yemen, and the UAE is willing to join a coalition to reopen the Strait of Hormuz. US Defense Secretary Pete Hagseth stated that bombing will continue until a deal is reached [6].
CONCLUSION
Markets responded strongly to signals of a possible de-escalation in the Middle East, with equities and risk-sensitive currencies rallying and volatility dropping. While optimism prevails, ongoing military actions and cautious policy statements suggest that uncertainty remains. Investors are closely watching upcoming economic data and official announcements for further direction.