Markets got the geopolitical outcome they wanted.

Now they have to confront the monetary policy reality they didn't.

At the start of the week, the narrative was clear.

The reopening of the Strait of Hormuz eased fears of a prolonged energy shock.

Oil prices fell sharply.

Risk appetite returned.

Equities surged to fresh highs as investors priced in lower inflation pressure and improving growth expectations.

That backdrop was reinforced by broad market strength.

The S&P 500 rallied.

The Nasdaq outperformed.

The Dow Jones reached record highs.

Bitcoin moved higher.

Treasury yields remained contained.

Under normal conditions, falling oil and easing inflation concerns should support expectations for easier monetary policy.

But this week, the market encountered a different problem.

By Wednesday, attention shifted back to the Federal Reserve.

Policymakers left rates unchanged, but updated projections signalled a more hawkish outlook than investors had expected.

Treasury yields rose.

The dollar strengthened.

Markets began reassessing the possibility that rates could remain restrictive for longer.

The focus quickly moved away from geopolitics.

It moved back to inflation.

Then by Thursday, sentiment improved once again.

Stocks rallied.

Bond yields declined.

Oil eased further.

Semiconductor shares pushed to record highs.

The catalyst was not AI.

It was the growing belief that the US-Iran peace agreement will continue reducing energy pressures and help prevent another inflation shock from emerging.

This is not a market ignoring monetary policy.

It is a market attempting to determine whether falling energy prices can offset the Fed's inflation concerns.

• Geopolitics → Oil → Inflation expectations → Central bank policy → Yields → Equity valuations

The first part of that chain has improved significantly.

The second part has not.

• The Hormuz agreement has reduced immediate energy risks
• Oil prices continue to ease
• Growth remains resilient
• AI investment remains strong
• But central banks remain cautious

That creates a fragile balance.

If inflation continues to cool, markets can begin pricing easier policy and extend the rally.

If inflation remains sticky, policymakers may keep rates restrictive despite improving geopolitical conditions.

So right now, markets are not asking whether the crisis is over.

They are asking whether lower oil prices are enough to solve the inflation problem.

The geopolitical challenge may be fading.

The policy challenge remains.