The US Dollar experienced significant selling pressure on Tuesday following the release of softer-than-expected US Consumer Price Index (CPI) data for June, which triggered notable rallies in both the Canadian Dollar (CAD) and New Zealand Dollar (NZD) [1][2]. The USD/CAD pair dropped to around 1.4055, its lowest level since June 17, marking a decline of nearly 0.70% on the day [1]. Simultaneously, NZD/USD surged to approximately 0.5820, up nearly 1.23% and making the Kiwi the best-performing major currency on Tuesday [2].
The US CPI fell 0.4% month-on-month in June after a 0.5% increase in May, a sharper decline than the anticipated 0.1% drop. Annual inflation slowed to 3.5% from 4.2%, below the 3.8% forecast. Core CPI was flat on a monthly basis, missing expectations for a 0.2% rise, while the annual core rate eased to 2.6% from 2.9%, under the 2.8% forecast [1][2]. The US Dollar Index (DXY) retreated to around 100.75 from an intraday high of 101.32 as a result [1][2].
Market expectations for Federal Reserve (Fed) interest rate hikes shifted dramatically after the CPI release. According to the CME FedWatch Tool, the probability of a July rate hike dropped to 12% from 40%, and the odds of a September increase fell to 59% from 74% [1][2]. In contrast, the Reserve Bank of New Zealand’s (RBNZ) hawkish stance further supported the NZD, while the CAD benefited from rising oil prices amid renewed Middle East tensions. West Texas Intermediate (WTI) crude traded around $78.00, up about 9% for the week, as hostilities between the US and Iran raised concerns over energy supplies through the Strait of Hormuz [1].
US President Donald Trump stated that the Strait of Hormuz would remain open to all shipping except vessels traveling to and from Iranian ports, and announced the withdrawal of a proposed 20% security fee, replacing it with trade and investment deals between Gulf states and the US [1]. Looking ahead, market participants are focused on the Bank of Canada’s monetary policy decision, with expectations for the policy rate to remain at 2.25% [1], and on Fed Chair Kevin Warsh’s congressional testimony. In prepared remarks, Warsh emphasized the Fed’s "no tolerance for persistently elevated inflation" and described the labor market as broadly stable, adding that if policy is managed correctly, the inflation surge of the past five years will become "a thing of the past" [2].
CONCLUSION
Softer-than-expected US inflation data triggered a sharp selloff in the US Dollar, boosting both the Canadian and New Zealand Dollars. Market participants have scaled back expectations for imminent Fed rate hikes, while attention now shifts to upcoming central bank decisions and further inflation data. The market reaction underscores the sensitivity of currency markets to US inflation trends and central bank policy outlooks.