Global financial markets moved cautiously higher on Friday as investors balanced optimism surrounding possible diplomatic progress between the United States and Iran against growing concerns that prolonged energy disruptions could reignite inflation across major economies. Stocks advanced across Europe, Asia, and U.S. futures markets, while the U.S. dollar remained near its strongest levels in more than six weeks as traders continued repositioning for a higher global interest rate environment.

Markets Respond Carefully to Uncertain Iran Negotiations

Investor sentiment improved modestly after U.S. Secretary of State Marco Rubio said there had been “some good signs” in negotiations aimed at ending the nearly three-month-long conflict involving Iran, the United States, and Israel. However, substantial disagreements reportedly remain over Iran’s uranium stockpile and future control of the Strait of Hormuz, one of the world’s most strategically important energy shipping routes.

The possibility of prolonged disruption through the strait continues to dominate global market psychology. Concerns over restricted oil flows have fueled volatility across equities, bonds, and currencies for weeks, particularly as higher crude prices increasingly feed into inflation expectations worldwide.

MSCI’s global equity index rose 0.22%, while Europe’s STOXX 600 gained 0.43%. U.S. futures also advanced modestly, with Nasdaq futures outperforming as artificial intelligence-related optimism continued supporting technology shares.

Japan’s Nikkei surged 2.8%, approaching record highs as semiconductor and AI-linked companies continued benefiting from strong global demand projections tied to data centre infrastructure and enterprise AI spending.

Oil and Inflation Concerns Reshape Interest Rate Expectations

Although oil prices remained below recent wartime peaks, energy markets stayed highly sensitive to geopolitical headlines. Brent crude climbed roughly 2% Friday to trade near $105 per barrel, while U.S. West Texas Intermediate crude approached $98 per barrel.

Investors increasingly fear that sustained energy inflation could force central banks to maintain tighter monetary policy for longer than previously expected. Before the Iran conflict escalated, markets had largely anticipated multiple Federal Reserve interest rate cuts during 2026. That outlook has now shifted dramatically.

Markets are currently pricing in more than a 50% probability that the Federal Reserve could raise interest rates again before year-end as inflation risks intensify.

George Saravelos, global head of foreign exchange research at Deutsche Bank, warned that rising energy costs combined with heavy fiscal spending and the ongoing AI infrastructure boom could create persistent inflationary pressure, particularly in the United States.

The evolving outlook has pushed Treasury yields higher while strengthening the U.S. dollar as investors seek both inflation protection and safe-haven exposure.

Dollar Strength and Bond Markets Reflect Global Uncertainty

The U.S. dollar index remained near 99.25, its highest level in more than six weeks, while the euro traded close to recent lows near $1.1614. Sterling and several emerging market currencies also remained under pressure as investors rotated toward dollar-denominated assets.

The Japanese yen traded near the psychologically important 160-per-dollar level despite recent intervention efforts from Tokyo estimated at roughly $65 billion. Currency markets remain highly sensitive to any signs that Japanese authorities may intervene again if yen weakness accelerates further.

Meanwhile, Japan’s latest inflation data complicated expectations for the Bank of Japan’s policy outlook. Although core inflation slowed to a four-year low in April, stronger GDP growth and resilient export data earlier this week reinforced expectations that the central bank may still pursue gradual rate increases.

Looking ahead, investors remain focused on whether diplomatic negotiations with Iran can produce meaningful progress capable of stabilizing energy markets and easing inflation fears. At the same time, markets continue recalibrating expectations for global monetary policy as geopolitical risks, energy costs, and AI-driven investment booms increasingly interact to shape the next phase of the global economic cycle.