Market expectations for a Federal Reserve interest rate hike in July have risen sharply, influenced by escalating geopolitical tensions and hawkish remarks from Fed officials. The FedWatch tool from the Chicago Mercantile Exchange indicates traders now assign a 46.5% probability to a 25-basis-point rate increase at the July 29th meeting, up from 34% on Sunday. On the prediction market platform Kalshi, this probability has also jumped from below 10% at the start of the month to 36%.

The primary driver behind this rapid shift in market sentiment is the renewed deterioration in the Middle East situation. The U.S. President announced the reinstatement of a blockade on Iranian ports and the imposition of a 20% transit fee on all cargo passing through the Strait of Hormuz. Consequently, international oil prices surged significantly, with Brent crude briefly spiking over 9% to reclaim a position above $80 per barrel. This rise in oil prices has directly reinforced market concerns that inflationary pressures may persist.

Concurrently, Federal Reserve Governor Christopher Waller delivered one of the most explicit hawkish signals to date. He stated that if the upcoming core inflation data this week shows renewed strength, the Fed would need to consider tightening monetary policy in the near term. Waller pointed out that current inflationary pressures stem from multiple factors including tariffs, energy prices, and large-scale AI infrastructure investments. He expressed concern that the core inflation rate has been trending upward consistently since the beginning of the year.

Although the market anticipates that June's CPI data will show some cooling in inflation—with economists forecasting the year-on-year increase to drop from 4.2% to around 3.8%—analysts warn that the outlook for cooling inflation could become more complicated. This is due to the potential for ongoing conflict in the Strait of Hormuz to continue transmitting the effects of rising energy prices into the economy, coupled with price pressures stemming from the AI investment boom.