The United States Dollar Index (DXY) pared earlier losses on Tuesday as traders oscillated between optimism and caution over a potential US-Iran deal.
At the time of writing, the DXY, which tracks the greenback’s value against a basket of six major currencies, is trading around 99.93 after rebounding from an intraday low of 99.68.
Earlier in the day, US President Donald Trump had sounded an optimistic tone saying talks with Iran were in the “final stages” and an agreement could be reached within days.
However, market sentiment changed later after Trump said in a Truth Social post that Iran had shot down a US Apache helicopter patrolling the Strait of Hormuz. “Nonetheless, the United States must respond to this attack as necessary,” Trump wrote.
Meanwhile, Israel continued military operations in southern Lebanon despite both sides agreeing to halt attacks, while Iran warned that fighting could resume if Israel continued its “aggression”.
The latest developments have dashed hopes of a near-term peace deal between the US and Iran. The two sides are also far apart on key issues, including Iran’s nuclear program, the release of frozen assets and Tehran’s demand for greater control over the Strait of Hormuz.
As a result, safe-haven demand for the US dollar remains intact. The greenback is also being supported by expectations of an aggressive Federal Reserve (Fed) stance amid energy-driven inflationary pressures.
The market is now waiting for the US inflation report on Wednesday. Economists expect the annual headline consumer price index (CPI) to rise from 3.8% in April to 4.2% in May. Core CPI is estimated to increase from 2.8% to 2.9%.
The stronger than expected inflation reading will strengthen expectations that the Fed may raise interest rates before the end of the year, providing further support to the USD.
According to the CME FedWatch tool, markets are currently pricing in a 35% probability of a 25-basis-point (bps) rate increase in September, with the probability rising to 40% for October and 42% for December.
economic indicators
Consumer Price Index (YoY)
Inflation or deflation trends are measured by adding up the prices of a basket of representative goods and services over time and presenting the data as a consumer price index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. Year-to-date readings compare the prices of commodities in a reference month with the same month a year earlier. CPI is a key indicator to measure changes in inflation and purchasing trends. Generally, higher readings are seen as bullish for the US dollar (USD), while lower readings are seen as bearish.
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