Markets traded in a subdued manner for much of the European session on Monday, weighed down by persistent uncertainty surrounding the Strait of Hormuz and the broader US-Iran standoff. The waterway carries roughly a fifth of global seaborne oil consumption, making any disruption a flashpoint for energy markets and global supply chains. Major equity indices hovered near flat levels, bond yields remained little changed, and currency markets lacked a clear directional catalyst as traders awaited fresh developments from the Middle East.

The tone shifted decisively in the latter part of the session after a flurry of headlines stoked optimism that a diplomatic breakthrough may be close at hand. US Treasury Secretary Scott Bessent said the United States could reach a deal with Iran "tomorrow" to reopen the Strait of Hormuz. He added that shipping activity through the strategic waterway was already showing signs of improvement and that energy prices should eventually stabilize.

Bessent's remarks reinforced earlier reports that mediators, including Qatar, were circulating draft language for a potential agreement designed to restore maritime traffic through Hormuz and lay the groundwork for renewed negotiations between Washington and Tehran.

Risk sentiment improved sharply following the headlines. US equity futures moved higher, the US dollar weakened, and oil prices slid rapidly as traders began assigning a lower probability to further escalation in the Gulf. The prospect of Hormuz reopening encouraged investors to unwind part of the geopolitical risk premium that had built up over recent weeks, with the decline in crude prices in turn lending further support to broader market sentiment.

Among currencies, EUR/USD surged above 1.15, aided partly by Japanese yen intervention. The yen had been under sustained pressure from the policy divergence between the Bank of Japan and other major central banks, prompting coordinated action from Tokyo and Washington. Attention now turns back to fundamentals, including this week's US non-farm payrolls report and consumer price index data, both of which carry added weight as traders assess whether easing energy costs could feed through to inflation expectations.

Despite the apparent diplomatic progress, caution remains warranted. Iranian officials have continued to send mixed signals regarding direct talks with Washington, and prior attempts at a durable agreement have encountered setbacks. Markets, however, remain acutely sensitive to any indication of progress, and hopes for an imminent US-Iran deal proved sufficient to ignite a rally in risk assets and a notable selloff in crude oil.

Other stories in focus during the session included Iran and Oman nearing a Hormuz shipping deal that challenges decades of free navigation; crude oil's initial rebound on mixed US-Iran messages as weekend risk kept prices underpinned; and Saudi Aramco's reported 44% profit surge, which underscored the extent to which elevated oil prices earlier in the cycle have bolstered producer revenues. Analysts also weighed whether Japan-US joint currency intervention marks a turning point for the yen, with a former Bank of Japan official stating that Tokyo and Washington would "certainly" intervene again should the yen resume its slide. FX option expiries for the 4 August 10am New York cut drew additional attention from traders.