On Tuesday, the US Dollar (USD) strengthened significantly against major currencies, driven by renewed geopolitical tensions in the Middle East and investor caution ahead of the US Consumer Price Index (CPI) release for April [1][2][3][4][5]. President Donald Trump stated that the US-Iran ceasefire is 'on life support,' with CNN reporting that his administration is seriously considering a resumption of major military operations [1][3][4][5]. Trump rejected Iran's latest peace proposal as 'totally unacceptable,' and Iranian officials warned of a strong response to any US aggression [4].
The USD/CAD pair rallied above 1.3700, approaching its highest levels in nearly a month at 1.3714, as the Canadian Dollar (CAD) declined amid risk-off sentiment. However, higher oil prices, with WTI trading above $98.00, provided some support to the CAD, given oil's importance to Canada's trade revenues [1]. The USD/JPY pair traded 0.26% higher near 157.60, although it remained capped below the 20-day EMA at 157.99. US Treasury Secretary Scott Bessent confirmed joint efforts with Japan to counter excessive currency volatility, causing a brief spike in the Japanese Yen (JPY) [2]. The USD/CHF pair rose to around 0.7815, up 0.46% on the day, as the Swiss Franc (CHF) weakened following signals from the Swiss National Bank (SNB) to limit currency appreciation. Swiss inflation rose to 0.6% in April, but remains well below the SNB's 2% target [5].
Gold (XAU/USD) reversed earlier gains, trading around $4,694 after hitting a three-week high of $4,773 during the Asian session. The precious metal faced selling pressure as the USD strengthened and US Treasury yields rose, with investors wary of oil-driven inflation and the possibility of the Federal Reserve (Fed) maintaining higher interest rates for longer [3][4]. Technical analysis indicates a neutral-to-bearish bias for gold, with initial support at $4,645 and further downside targets at $4,610 and $4,500 [3][4].
Consensus expectations for the US CPI point to an acceleration in annual inflation to 3.7% from 3.3% in March, with core CPI seen rising to 2.7% from 2.6% [1][3][4][5]. Headline CPI is expected to rise 0.6% month-on-month, easing from 0.9% in March, while core CPI is forecast to increase 0.3% MoM after a 0.2% rise in March [4]. A hotter-than-expected CPI reading could reinforce the narrative of higher-for-longer US interest rates, supporting the USD and weighing on non-yielding assets like gold [4][5]. According to the CME FedWatch Tool, traders expect the Fed to keep rates unchanged for the remainder of the year, though there is a modest chance of a rate hike at the December meeting, with the probability near 30% [4]. MUFG economists note that a prolonged closure of the Strait of Hormuz and sustained energy price increases could push the SNB toward a more hawkish stance, with money markets starting to price in a higher chance of an SNB rate hike by year-end [5].
CONCLUSION
The US Dollar's broad-based strength reflects heightened geopolitical risks and expectations of elevated US inflation, with markets bracing for the CPI release to shape the Federal Reserve's policy outlook. Risk-off sentiment has pressured commodity currencies and non-yielding assets, while central banks remain cautious amid persistent inflation concerns. A hotter CPI print could further boost the USD and reinforce the higher-for-longer rate narrative, intensifying market volatility across currencies and commodities.