Fed and Geopolitical Risks Escalate in Parallel as the ECB May Be Forced Into a Hawkish Shift

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Summary:

U.S.-Iran negotiations have made significant progress, but Washington is also preparing a military “Plan B”; the ECB may be forced to raise rates in June if the Iran conflict persists...

Highlights

1. U.S.-Iran negotiations have made significant progress, but Washington is also preparing a “Plan B”

2. Israeli officials believe the U.S. still leans toward resuming military action against Iran

3. The Israeli military has entered its highest level of alert

4. Republican senator breaks ranks as the Senate advances a bill to withdraw from Iran

5. Holzmann: The ECB may have to raise rates in June if the Iran conflict continues

6. Bessent: Kazuo Ueda will take necessary action if granted sufficient independence

Details

U.S.-Iran negotiations have made significant progress, but Washington is also preparing a “Plan B”

U.S. Vice President JD Vance said at a White House press briefing on May 19 that negotiations between the United States and Iran have made substantial progress, but Washington is also preparing a “Plan B” involving renewed military action.

“At this point, there are only two options: either reach a good agreement or return to military action,” Vance said. “The United States wants an agreement, and Iran also appears inclined toward one. We do not want to go down that road, but if necessary, the president is willing and capable of doing so.”

Vance stressed that Iran must never possess nuclear weapons, calling it a firm U.S. red line. He added that Washington hopes to work with Tehran to establish an effective mechanism ensuring Iran cannot rebuild its nuclear capabilities, which he described as the central goal of the negotiations.

Israeli officials believe the U.S. still leans toward resuming military action against Iran

According to Israeli sources on the evening of May 19 local time, although U.S. President Donald Trump announced the cancellation of a planned strike on Iran the previous day, senior Israeli officials believe Trump still favors resuming military action against Tehran.

Additional Israeli sources said joint U.S.-Israeli preparations for renewed military operations against Iran have already been completed and are now awaiting Trump’s final decision.

The Israeli military has entered its highest level of alert

With the possibility of U.S. military action against Iran in the coming days, the Israeli military has entered its highest state of alert.

Israel was reportedly surprised by Trump’s decision to postpone the planned strike and was informed only at the last minute. The Israeli Air Force is now preparing for a scenario in which Trump could authorize strikes on Iran within days.

Reports indicate that Israel and the United States have completed a joint air force assessment for a new round of conflict, with both sides taking measures to ensure any future strikes would inflict significant damage, including steps to maintain air superiority.

Republican senator breaks ranks as the Senate advances a bill to withdraw from Iran

The U.S. Senate on Tuesday advanced a bill aimed at forcing Trump to withdraw U.S. forces from Iran after Louisiana Republican Senator Bill Cassidy cast the decisive vote following his defeat in a primary election.

Since late February, Democrats have repeatedly forced votes requiring Trump either to obtain congressional authorization to continue military operations or to withdraw troops. Republicans had previously blocked those efforts, but Cassidy’s defection broke the deadlock.

Cassidy recently lost his re-election primary after Trump endorsed his opponent. He had previously criticized Trump’s use of nearly $1.8 billion to compensate allies, and his latest vote is widely viewed as a public rebuke of the president.

Holzmann: The ECB may have to raise rates in June if the Iran conflict continues

European Central Bank Governing Council member and Austrian central bank governor Robert Holzmann said Tuesday that the ECB may have to raise interest rates at its next meeting in June unless tensions in the Middle East ease and energy prices decline.

“To avoid a rate hike, it must become very clear that the Strait of Hormuz will remain navigable in some form and that more oil, fertilizer, and other products from the region can enter global markets,” Holzmann said.

He added that no one can accurately predict eurozone inflation by the end of the year because the outcome depends almost entirely on the duration of the conflict and the length of any disruption in the Strait of Hormuz. The longer hostilities continue, the higher inflation is likely to rise.

Bessent: Kazuo Ueda will take necessary action if granted sufficient independence

U.S. Treasury Secretary Scott Bessent said in an interview with Reuters that he believes Bank of Japan Governor Kazuo Ueda will take whatever action is necessary if granted sufficient independence by the Japanese government, implying that Washington hopes for further BOJ rate hikes.

“I think he is an excellent central bank governor. If they give him the room to do what he needs to do — and what he will do — then I believe they will have very good monetary policy,” Bessent said.

His remarks reiterated long-standing confidence in Ueda while also suggesting that the success of Japanese monetary policy partly depends on whether Prime Minister Sanae Takaichi’s government allows the BOJ to maintain independence in interest-rate decisions.

Bessent also said Japan’s economic fundamentals remain strong and that excessive volatility in the yen is undesirable.

Today’s Focus

14:00 (UTC+8) Germany April PPI MoM

14:00 (UTC+8) UK April CPI

15:00 (UTC+8) Speech by a candidate for Governor of the Banque de France

02:00 (UTC+8) Release of the Federal Reserve meeting minutes

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