Major European markets are set to open higher as investors embrace the prospect of an agreement between Iran and the United States to end the war in the Middle East, soothing a significant portion of current market fears.

The protocol envisioned by Washington and Tehran, slated for conclusion on June 19, establishes not only the terms for a cessation of hostilities but also the conditions for reopening the Strait of Hormuz. This will precede a sixty-day negotiation phase intended to resolve the most sensitive issues, beginning with the fate of the Iranian nuclear program.

These breakthroughs are expected to drive investors toward risk assets on this first trading day of the week.

Market participants had already moved back into risk assets on Friday after Donald Trump suggested a deal was imminent to halt the conflict in the Gulf following nearly four months of fighting. The Europe STOXX 600 index rose 1.9% on the news, while the S&P 500 gained approximately 0.5%.

Diplomatic progress was already fueling significant gains across Asian markets. In Tokyo, the Nikkei index jumped nearly 5% late in Monday's session.

On Wall Street, New York index futures currently signal an opening with gains ranging from 1% to 2%.

Baptism of Fire for Kevin Warsh

Despite the de-escalation in the Middle East, markets may continue to navigate a climate of mixed optimism and uncertainty as investors await further clarity on Federal Reserve monetary policy amid fears of resurgent inflationary pressures in the United States.

The Fed's policy committee will announce its interest rate decision and publish its new economic forecasts on Wednesday evening, followed by the first press conference from the institution's new chairman, Kevin Warsh.

While an overwhelming majority (97%) of analysts predict rates will remain unchanged, they warn that the meeting is likely to be "hawkish," as recent economic data suggests a bias toward easing is not justified.

"While Kevin Warsh was chosen by Donald Trump to lead a policy of cutting key rates, it will be very difficult for him to convince FOMC members to carry out this plan because inflation has accelerated sharply since the start of the war in Iran (4.2% in May) and because three strong employment reports have followed one another (more than half a million jobs created in 3 months)," says Bastien Drut, head of strategy and analysis at CPRAM.

Investors will be particularly attentive to the tone of the new chairman's remarks in an attempt to discern the trajectory of future policy decisions.

According to the CME FedWatch tool, 30% of market participants do not rule out at least one rate hike by the end of the year, given the recent firming of inflation.

A Busy Schedule, Despite a Shortened Week on Wall Street

The Bank of England is also expected to keep its rates unchanged on Thursday, though the vote could become more balanced with more members favoring a rate hike.

Barring a major surprise, the Bank of Japan is expected to raise its main rate once again at the conclusion of its meeting tomorrow.

In addition to central bank meetings, the week promises to be rich in economic indicators, notably U.S. retail sales figures due Wednesday. These are expected to confirm that consumption remains solid across the Atlantic despite soaring gasoline prices, another factor that could justify a less accommodative policy from the Fed.

In the bond market, the appetite for risk assets is weighing on 10-year Treasury prices, with the yield rising more than two basis points to 4.4870%.

In currency markets, the euro is climbing toward $1.1615 against the dollar, as easing geopolitical fears overshadow the prospect of a more hawkish Fed stance, which typically favors the greenback.

Oil prices are logically retreating following the tentative agreement reached between Washington and Tehran.

Brent crude is down 4.2% at $83.6 per barrel, and West Texas Intermediate (WTI) is shedding more than 4.2% to trade below $80.8.

"Oil prices can now be considered to have returned to levels seen as normal, around $83 per barrel, since for comparison, they were around $70 before the start of the war," the team at Danske Bank noted this morning.

The return of risk appetite is not penalizing safe-haven assets like the yen (+0.1%) or gold (+2.2%).

Note that the trading week will be shortened in New York due to the Juneteenth holiday, which will mark the commemoration of the end of slavery on Friday.