The US Dollar maintained a neutral to firm stance following the release of the April US Consumer Price Index (CPI), with TD Securities' FX team, led by Jayati Bharadwaj, adopting a neutral short-term outlook. They noted that while reopening the Strait of Hormuz could weaken the USD, robust US labor market data and equity outperformance have limited the downside risk for the currency. Conversely, significant USD gains are seen as unlikely unless US inflation accelerates further or global demand deteriorates [1].
The Bureau of Labor Statistics reported that US inflation, as measured by the CPI, rose to 3.8% year-over-year in April from 3.3% previously, surpassing market expectations of 3.7%. On a monthly basis, CPI increased by 0.6%, matching forecasts. Core inflation climbed to 2.8% year-over-year from 2.6%, exceeding the 2.7% consensus. Energy prices surged 3.8% in April, contributing to over 40% of the monthly CPI increase, while shelter and food costs also continued to rise, highlighting persistent inflationary pressures [2].
Market reaction to the CPI release was relatively muted according to TD Securities, due to soft core goods inflation and limited tariff passthrough. However, the US Dollar Index (DXY) advanced toward 98.40 and US Treasury yields moved higher as investors scaled back expectations for Federal Reserve monetary easing. The probability of a Fed rate hike by December increased to 30.3% after the CPI release, up from 21.5% the previous day, according to the CME FedWatch tool [1][2].
The New Zealand Dollar (NZD) declined, with NZD/USD trading around 0.5940, down 0.41% on the day, pressured by the stronger-than-expected US inflation data and the resulting rebound in the USD. On the New Zealand side, expectations that the Reserve Bank of New Zealand (RBNZ) may maintain a cautious stance or consider further tightening could help limit NZD/USD losses. Markets are now awaiting the RBNZ’s Q2 inflation expectations report, scheduled for release on Wednesday [2].
Geopolitical tensions in the Middle East also contributed to safe-haven demand for the US Dollar, with concerns heightened after US President Donald Trump stated that the US-Iran ceasefire was “on massive life support,” raising fears of renewed military operations [2].
CONCLUSION
Stronger-than-expected US inflation data has reinforced the US Dollar's position, prompting markets to reassess the likelihood of further Federal Reserve rate hikes and pressuring the New Zealand Dollar. While the USD remains capped in both directions, persistent inflation and geopolitical risks are supporting its safe-haven appeal. Investors are now focused on upcoming central bank responses and inflation data for further direction.