Written by Trump says US-Iran ceasefire is “on life support”
The US dollar pulled back against all its major peers on Monday, despite opening with a positive gap on headlines that US President Trump rejected Iran’s response to the US peace proposal. However, the greenback recharged today as peace talks between the US and Iran remained stalled, with Trump saying that the ceasefire was “on life support” due to lack of consensus and the back and forth on the latest truce proposal.
These developments intensified fears about the Strait of Hormuz remaining blocked for a prolonged period and pushed oil prices higher again. This translated into more basis points worth of Fed rate hikes being priced in for next year, as higher energy prices are most likely to keep inflation elevated for longer. According to Fed fund futures, investors are now penciling in 17bps worth of hikes by April 2027, which means a nearly 70% chance of a quarter-point hike.
With that in mind, traders are likely to pay extra attention to today’s CPI data for April. Expectations are for the headline rate to have jumped to 3.7% y/y from 3.3% and the core rate to have ticked up to 2.7% y/y from 2.6%. An inflation rate that is nearly double the Fed’s objective of 2% could push the probability of a Fed rate hike even higher and thereby provide some further support to the US dollar.
Bessent and Katayama coordinating on FX policy
Elsewhere, the yen spiked higher in early European morning today, but it was quick to surrender those instant gains and stay on the back foot against its US counterpart.
It seems that this may have been another “rate check,” or a small intervention episode. After all, it was highlighted by Japan’s top currency diplomat Atsumi Mimura last week that they don’t have restrictions when it comes to acting, while US Treasury Secretary Scott Bessent, who is currently in Japan to discuss the yen’s moves, said that the US and Japan maintain “constant and robust” coordination in preventing speculative and excessive moves in the currency market.
Still, for any intervention effort to have a meaningful and long-lasting impact, the Bank of Japan may also proceed with a series of interest rate increases. Following the latest relatively hawkish decision and the encouraging wage data, investors are now assigning a 70% chance of a 25bps rate hike at the upcoming gathering in June.
The pound is also on the backfoot amid the political turmoil in the UK. After the ruling Labor Party suffered losses in local elections, several ministerial staff members quit and around 80 lawmakers called for Prime Minister Starmer to step down. Investors are now concerned that Stramer could be replaced by a more left-leaning Labor leader, who could further increase public borrowing.
Stocks pull back after new record highs, gold also retreats
On Wall Street, all major indices finished their session in the green, with the S&P 500 and the Nasdaq hitting fresh record highs. Perhaps the driver was not only AI euphoria, but also some optimism that Trump’s visit to China will achieve an easing in tariff tensions between the world’s two largest economies and that China may have some influence on deescalating the Middle East conflict.
That said, stock futures are in the red today, mainly after Trump implied that the ceasefire could be breached soon and new hostilities could reemerge. The CPI data pose another downside risk as accelerating inflation and a stronger chance of a rate hike at some point next year mean lower present values for high-growth firms that are valued by discounting expected cash flows.
Gold is also pulling back, but it remains above the key support zone of $4,640. A hotter-than-expected CPI report today could push the metal below that barrier and perhaps allow declines towards last week’s low of $4,510.
by XM.com
