US Dollar Strengthens as Fed Rate Hike Bets Rise
The US Dollar maintains a favorable position near 99.15 in early European trading on Tuesday, supported by the ambiguous geopolitical landscape. Market participants processed the announcement from US President Donald Trump regarding his decision to “hold off” on a planned attack on Iran, which was made at the behest of Gulf leaders. Trump further stated that the US would be “probably satisfied” if it could reach an agreement with Iran that prevents Tehran from obtaining a nuclear weapon, according to the Guardian. Nevertheless, the US President indicated that Washington stood ready to initiate military action should a satisfactory agreement not be achieved, yet refrained from establishing a timeline. Market participants adjust their assessments regarding the likelihood that the US Federal Reserve will need to implement tighter monetary policy in response to persistent inflationary pressures, particularly in light of the ongoing closure of the Strait of Hormuz and the resultant disruptions in energy markets.
Market participants are assigning a 35.0% likelihood to the Federal Reserve implementing a 25 basis points increase in interest rates by the end of the year, as indicated by the CME FedWatch tool. The preliminary report released by the Cabinet Office indicated on Tuesday that the Japanese economy grew by 0.5% quarter-on-quarter in the first quarter of 2026, in contrast to the 0.3% growth recorded in the fourth quarter of 2025. This figure exceeded the anticipated 0.4% expansion. Meanwhile, Japan’s economy expanded at an annualized rate of 2.1% in the first quarter, compared to a previous growth rate of 1.3%, surpassing the market consensus of 1.7%, driven by enhanced consumption and robust exports. The minutes from the Reserve Bank of Australia revealed that eight out of nine board members supported the rate increase to 4.35% in May, attributing their decision to escalating inflation risks stemming from the Gulf conflict. One member expressed a preference to defer judgment until additional data becomes available. “Members noted that inflation had been well above target in the months prior to the onset of the conflict in the Middle East,” the RBA minutes indicated.
Members concurred that monetary policy would be unable to avert a short-term rise in the price level, as elevated fuel prices permeated through to final prices. As we look forward, market participants prepare for the upcoming Canadian Consumer Price Index inflation report, scheduled for release later on Tuesday. The headline CPI is projected to increase by 3.1% year-over-year in April, up from 2.4% in March. On a monthly basis, the CPI is anticipated to reflect an increase of 0.6%, compared to the previous figure of 0.9%. EUR/USD experiences a decline, approaching 1.1645 during the European morning session. Energy supply constraints arising from tensions in the Middle East may exert pressure on the shared currency. However, hawkish remarks from European Central Bank policymakers may serve to constrain the EUR’s depreciation. GBP/USD continues to exhibit weakness, hovering near 1.3415, as it faces pressure from ongoing political turmoil in the UK. The UK ILO Unemployment Rate increased to 5.0% in the three months ending in March, up from 4.9% in the prior report, as stated by the Office for National Statistics on Tuesday. This figure exceeded the market consensus of 4.9%. In April, the count of individuals filing for jobless benefits increased by 26.5K, in contrast to a revised rise of 4.9K in March and the anticipated gain of 27.3K. The Employment Change recorded a figure of 148K in March, compared to the 25K observed in February.
This marks the continuation of the USD/JPY pair’s gain for a seventh consecutive day during the European morning on Tuesday. The pair has advanced to about 158.90, marking the beginning of the day. Satsuki Katayama, the Minister of Finance of Japan, stated on Monday that the government is ready to respond to excessive foreign exchange volatility at any point. However, they are also prepared to ensure that any intervention is carried out in a manner that does not result in a rise in the yields on US Treasury securities. Gold prices fall to $4,545 after a day of moderate gains on Tuesday. This comes after the price of gold decreased. Concerns about inflation and expectations of a more stringent monetary policy have been heightened as a result of the crisis in Iran, which has resulted in increasing the amount of pressure placed on precious metals.
