The US Dollar Index (DXY) and USD/CAD currency pair both experienced subdued trading during the Asian session on Tuesday, following the announcement that Iran and Israel had halted attacks against each other. This de-escalation, reportedly after an appeal from US President Donald Trump, improved global risk sentiment and led to a decline in the safe-haven US Dollar, with the DXY trading around 100.00 for the second consecutive day [2]. Similarly, the USD/CAD pair edged lower, eroding part of the previous day's gains and trading just below the mid-1.3900s, down less than 0.05% for the day [1].
Despite the ceasefire, market optimism remains limited due to ongoing US-Iran disagreements over Tehran's nuclear program and the Strait of Hormuz, as well as hawkish US Federal Reserve expectations [1]. Israeli Prime Minister Benjamin Netanyahu stated that the war against Iran and Hezbollah "has not yet ended," while Iran’s military warned of harsher actions if Israel continues its attacks, highlighting persistent geopolitical risks [2].
Strong US jobs data has reinforced inflation fears and heightened expectations of Federal Reserve rate hikes. According to the CME FedWatch tool, traders have raised the probability of a December quarter-point rate hike to 42%, up from 14% a month ago [2]. Meanwhile, traders are pricing in over a 70% chance of a Fed rate hike in 2026, reaffirmed by Friday's upbeat US jobs data [1]. These expectations are lending support to the USD and limiting its downside against the Canadian Dollar, despite the recent risk-on sentiment.
Easing geopolitical tensions have weighed on Crude Oil prices, undermining the commodity-linked Canadian Dollar and capping its gains against the USD [1]. The market is now focused on the upcoming US Consumer Price Index (CPI) and Producer Price Index (PPI) reports for May, scheduled for Wednesday and Thursday, respectively. These crucial US inflation figures are expected to influence expectations about the Fed's future policy path and drive USD demand [1][2].
CONCLUSION
The Iran-Israel ceasefire has temporarily weakened the US Dollar and supported risk sentiment, but persistent geopolitical risks and strong US economic data are sustaining expectations of Federal Reserve rate hikes. Both the USD and CAD remain sensitive to upcoming US inflation data and developments in the Middle East, with market participants closely watching for further policy signals and oil price movements.