Week ahead: Markets on edge as Israel-Iran conflict deepens, Fed policy decision looms

Wall Street enters a pivotal week with investors watching developments on multiple fronts — from the escalating conflict between Israel and Iran to a Federal Reserve policy decision that could shape the interest rate outlook for the rest of the year.

Traders will have to navigate a tense geopolitical backdrop after Israel launched fresh strikes on military targets in Tehran over the weekend, while Iran responded with additional missile attacks. The threat of broader regional escalation has kept investors on edge, even as market reaction has been relatively contained to start the week.

Despite the renewed hostilities, oil and gold prices have remained subdued. West Texas Intermediate crude was trading around $72 a barrel on Monday, while gold edged lower.

“Headline risk is huge as we start a new week,” said Kathleen Brooks, research director at XTB.

“So, why the sense of calm in financial markets when the war between the two countries continues to rage?” Brooks asked. “President Trump seemed to calm fears when he said that the two sides could find a resolution, but they need to fight it out first.”

OPEC+’s supply boost is “helping to cushion the blow,” Brooks added.

Still, Brooks warned that if the conflict escalates to include attacks on oil export routes or the Strait of Hormuz, which transports a fifth of the world’s oil, “the oil price could have further to run.”

Fed decision looms

Against this uncertain backdrop, investors will turn their attention to the Federal Reserve’s policy decision on Wednesday. While the central bank is widely expected to leave its benchmark rate unchanged, the updated Summary of Economic Projections and Chair Jerome Powell’s press conference will be closely scrutinized for clues on the timing and extent of future rate cuts.

“We expect the Fed to hold rates steady and mostly maintain existing signals about policy,” Deutsche Bank analysts wrote. “The statement, Summary of Economic Projections (SEP), and Chair Powell's press conference will all likely indicate that the Fed can remain patient with adjusting policy.”

Inflation remains a key concern for policymakers. Powell is expected to emphasize the importance of keeping inflation expectations anchored, particularly as rising oil prices and new tariffs complicate the outlook.

“Recent research has shown that short-run inflation expectations should receive more attention from policymakers,” Deutsche Bank wrote. “Some officials appear to be taking the message on board.”

Eye on the numbers

The economic calendar is also packed with data that could influence markets. Tuesday will bring the May retail sales report, with economists forecasting a 1.0% drop in headline sales due to weaker auto purchases. However, Deutsche Bank expects a rebound in core retail control, calling for a 0.3% increase.

The same day will see the release of industrial production data, while housing starts and building permits are due Wednesday. Weekly jobless claims, typically released Thursday, will instead be published on Wednesday due to the Juneteenth holiday.

Despite softer inflation readings in May and signs of a slowing labor market, the Fed is unlikely to commit to a dovish pivot just yet. Brooks noted that “there is a mere 3% chance of a rate cut from the Fed this week,” and the central bank is likely to remain noncommittal amid lingering risks.