The ceasefire is over. The negotiations continue. This contradiction now defines the relationship between the United States and Iran. Over the weekend, both sides exchanged another wave of strikes across the Gulf. US forces targeted Iranian air defences, coastal radar systems, missile sites and drone capabilities. Tehran responded by attacking American bases and regional allies in Kuwait, Bahrain, Jordan, Qatar and Oman. At the centre of the confrontation remains the Strait of Hormuz. Iran claims that the passage is closed until further notice. Washington insists that it remains open. Commercial vessels continue to transit sporadically, often without active transponders and under military coordination. In practical terms, the Strait is neither fully open nor fully closed. It has become a contested maritime zone. This ambiguity is not accidental. It is now part of the strategy. Donald Trump has declared the ceasefire over while simultaneously allowing negotiations to continue. The United States has imposed new sanctions, revoked oil waivers and launched some of the largest strikes since the beginning of the conflict. At the same time, American officials continue discussing technical arrangements with Iranian intermediaries. Washington is attempting to fight and negotiate simultaneously. Tehran is doing exactly the same. The result is not peace. It is managed escalation.

The immediate objective of both sides appears relatively clear. The United States wants to guarantee freedom of navigation without becoming trapped in another prolonged war in the Middle East. Iran wants to demonstrate that no durable regional settlement can be imposed without recognising its influence over the Strait of Hormuz. Neither side appears willing to concede. Neither side appears prepared to pursue total war. This is what makes the current situation so dangerous. Traditional wars eventually produce clear strategic outcomes. One side wins, one side loses, or both become exhausted enough to compromise. The present conflict follows a different logic. Military pressure is being used not to end negotiations but to improve bargaining positions within them. Every strike becomes a message. Every tanker becomes leverage. Every disruption to Hormuz becomes part of the diplomatic process.

For financial markets, this creates a particularly unstable environment. Brent crude has moved back above USD 79 per barrel as investors reassess the risk of renewed supply disruption. Shipping costs remain elevated. LNG flows are increasingly uncertain. Countries such as India, heavily dependent on Gulf energy, are being forced to negotiate directly with Iran to protect vessels and crews. The global economy is therefore becoming hostage to a maritime corridor barely thirty miles wide. This is no longer simply an energy story. It is a monetary policy story. Higher oil and gas prices keep inflation elevated at precisely the moment when central banks are attempting to restore credibility. The Federal Reserve already faces inflation above target, resilient consumer demand and an investment boom linked to artificial intelligence. Another prolonged energy shock would make its position even more difficult.

Yet the Fed’s ability to respond remains limited. Raising rates aggressively would threaten growth, public finances and financial stability. Keeping rates unchanged risks allowing inflation to remain embedded. This reinforces our central view: nominal rates may remain relatively high, but real rates are likely to stay close to zero. That environment remains supportive for selected real and floating-rate assets. It is far less supportive for long-duration bonds, highly leveraged companies and economies dependent on imported energy.

The dollar may also benefit in the short term from higher US yields and renewed demand for liquidity. But this should not be confused with a structural improvement in the US currency’s long-term outlook. The fiscal position of the United States remains fragile, Treasury issuance continues to expand, and the cost of financing the American state continues to rise. Short-term dollar strength and long-term dollar vulnerability can coexist.

The same is true of oil. Prices may rise sharply during each escalation and fall rapidly whenever negotiations resume. The direction may remain uncertain, but volatility is becoming structural. This is perhaps the most important conclusion for investors. The Middle East is no longer moving between war and peace. It is moving between different intensities of conflict. The ceasefire may have ended. The negotiations may continue. But the distinction between diplomacy and warfare is disappearing. And markets will have to learn how to price a conflict that no longer knows where one ends and the other begins.