US-Iran jitters 'lending support to USD' – Peaceful resolution 'remains our base case scenario'

The US Dollar Index dropped by around half a percent on Tuesday off the back of the soft CPI report. The main rate fell to 3.5%, a meaningful easing from the 4.2% in the previous month and below the 3.8% consensus. The core rate also dropped to 2.6% from 2.9%, which again was below the 2.8% that had been pencilled in by economists.

While the report supports our call for no change in Fed rates this year, markets are still more than fully pricing in a hike by the end of 2026 given that firstly, oil prices have jumped again since last month, and secondly, a handful of FOMC officials, including Chris Waller earlier in the week, have noted that several weaker inflation prints would be needed to avoid tightening.

Lingering jitters over the US-Iran negotiations also appear to be lending support to the dollar. Fresh military strikes and the reimposition of America's naval blockade in the Strait of Hormuz are keeping investors on edge.

In our view, Trump is again running through plays in his negotiating playbook, and a peaceful resolution remains our base case scenario - his retreat from plans to impose a 20% fee on all vessels transiting Hormuz is a case in point.