US inflation data released by the Bureau of Labor Statistics showed that the headline Consumer Price Index (CPI) rose 0.6% month-on-month in April, following a 0.9% increase in March, which was in line with market expectations. On an annual basis, inflation accelerated to 3.8% from 3.3%, surpassing forecasts of 3.7% [1][2]. Core CPI, which excludes volatile food and energy prices, increased 0.4% month-on-month, up from 0.2% in March and above expectations of 0.3%. Annual core inflation climbed to 2.8% from 2.6%, also exceeding forecasts of 2.7% [1][2].
The hotter-than-expected inflation data, combined with last week’s upbeat Nonfarm Payrolls report, reinforced expectations that the Federal Reserve (Fed) could keep interest rates higher for longer [2]. According to the CME FedWatch Tool, the probability of a rate hike at the September meeting stands near 13.5%, rising to around 32% for the December meeting [1][2]. This outlook pushed US Treasury yields higher and lifted the US Dollar Index (DXY) to around 98.40, up roughly 0.35% on the day [1][2].
Currency markets responded sharply: USD/CAD climbed to around 1.3715, near its highest level since April 16, as the stronger US Dollar offset support for the Canadian Dollar from elevated oil prices [1]. EUR/USD fell to around 1.1743, down approximately 0.35% on the day, as the Euro came under pressure from the Greenback’s strength [2]. Ongoing disruptions in the Strait of Hormuz and stalled US-Iran peace negotiations provided additional support to the US Dollar, with US President Donald Trump stating the ceasefire is “on massive life support” [1][2].
Looking ahead, the Canadian economic calendar is relatively light, leaving USD/CAD sensitive to US Dollar and oil price dynamics [1]. In the US, traders are awaiting Producer Price Index (PPI) data on Wednesday and Retail Sales figures on Thursday [1]. In the Eurozone, traders are pricing in at least two rate hikes from the European Central Bank (ECB) this year, but concerns about slower economic growth due to higher energy costs may limit the ECB’s ability to tighten policy aggressively [2].
CONCLUSION
Stronger-than-expected US inflation data has reinforced expectations for a hawkish Federal Reserve, driving the US Dollar higher against major currencies and lifting Treasury yields. Market participants are now increasingly betting on the possibility of a Fed rate hike later this year, while upcoming US economic data and ongoing geopolitical tensions remain in focus.