The US dollar edged slightly lower on Tuesday, though it remained firmly anchored near 13-month highs as global investors braced for upcoming US consumer price index (CPI) data. Market anxiety is running high as escalating Middle East tensions—highlighted by recent military exchanges in the Gulf—have severely disrupted maritime traffic through the critical Strait of Hormuz, driving global crude oil prices toward $90 a barrel. This sharp rise in energy costs has intensified fears of persistent, broad-based price pressures, throwing a sharp spotlight on the June inflation report. Economists project headline inflation to climb to 3.8% annually, while the core rate, which strips out volatile food and energy costs, is expected to settle at 2.8%.
The prospect of resurgent inflation has heavily altered the interest rate outlook, lending a strong floor of support to the greenback. Investors are now pricing in a 20% probability that the Federal Reserve will raise interest rates later this month, a hawkish shift reinforced by Fed Governor Christopher Waller’s recent warning that borrowing costs may need to climb “in the near term” to curb stubborn inflation. This rate outlook has pushed US Treasury yields past 4.6%, their highest level since May. Adding to the policy uncertainty, market participants are also closely parsing Federal Reserve Chair Kevin Warsh’s debut semiannual testimony to Congress for clues on the central bank’s next moves. In the currency market, the minor dollar pullback allowed the euro and sterling to gain 0.2% to $1.1399 and $1.337 respectively, though a spike in overnight euro implied volatility past 10% underscores deep-seated market nervousness ahead of the high-stakes data release.
