Brent crude back above $107 and April CPI at 3.8% yoy lifted Fed tightening expectations, while sterling slumped on UK political turmoil. Next catalyst: Trump-Xi summit.
Rising oil prices and a hotter-than-expected US inflation report pushed Federal Reserve rate-hike expectations to 28% on Tuesday, driving the dollar broadly higher. The move, however, remained measured. Broader risk appetite held firm, with investors reluctant to shift fully into defensive positioning ahead of the Trump-Xi summit later this week. The result was a dollar rally that reflected higher rate differentials without triggering a wholesale flight to safety. For a deeper look at how oil blockades have been shaping dollar ranges, see our previous analysis.
Brent crude climbed back above $107 and WTI traded above $100 on Tuesday. Stalled US-Iran peace negotiations kept a geopolitical risk premium in energy markets. Both benchmarks remain largely trapped within the broad consolidation ranges established after the sharp March spike. This suggests traders still view the Strait of Hormuz crisis as unresolved, though not yet spiraling into a full-scale supply disruption. The eventual direction of the Hormuz situation may depend heavily on the outcome of Thursday’s Trump-Xi summit.
The second major support for the dollar came from the US inflation data. April CPI showed headline inflation accelerating from 3.3% yoy to 3.8% yoy, while core CPI rose from 2.6% yoy to 2.8% yoy. Both readings came in slightly above expectations. The firmer core numbers raised concern that energy-driven inflation pressures may now be spreading more broadly into underlying consumer prices. Rising gasoline, shelter, and food costs suggest inflation is broadening beyond energy alone.
Fed fund futures subsequently pushed further toward pricing no rate cuts this year. Implied odds of a rate hike rose toward 28%. The “higher for longer” narrative gained traction, reducing expectations for any easing in 2025. This shift in the policy outlook directly lifted US yields and widened the dollar’s rate advantage over major peers.
The repricing of Fed expectations pushed US 10-year yields higher. The UK 10-year yield rose 0.105 to 5.11%, Germany’s 10-year yield added 0.049 to 3.092%, and Japan’s 10-year JGB yield climbed 0.019 to 2.544%. The widening yield gap between the US and other developed markets provided a fundamental bid for the dollar. In currency markets, the performance order was clear:
Despite the supportive rate backdrop, the dollar’s rally remained restrained. US equities held relatively firm, with ongoing optimism surrounding AI-related investment themes and semiconductor demand keeping risk appetite alive. The market tone suggests investors are pricing higher inflation risk without yet fully shifting into outright crisis positioning. This prevented a more aggressive dollar surge.
Key insight: The dollar is benefiting from rate differentials, not a safety bid. That makes the rally more sustainable. It also makes it vulnerable to any improvement in risk sentiment.
Sterling came under intense pressure after the first ministerial resignation demanding Prime Minister Keir Starmer’s departure transformed Labour’s political crisis into a broader market concern. Miatta Fahnbulleh’s resignation turned the leadership crisis into an immediate market event. Markets had already become uneasy after Labour’s poor local election results last week. With more than 80 MPs reportedly calling for a leadership transition, traders are increasingly pricing “zombie government” risk into UK assets. The Pound later stabilized after senior Cabinet ministers rallied behind Starmer following a critical internal meeting where he insisted he would not resign voluntarily without a formal leadership challenge. Track the GBP/USD profile for real-time levels.
GBP/USD declined, staying above 1.3453 support. Intraday bias remains neutral, and further rally is in favor. A firm break of 1.3657 would resume the rally from 1.3158 to retest the 1.3867 high. A decisive break of 1.3453 would argue that the rebound has already completed and turn bias to the downside for a retest of 1.3158. In the bigger picture, price actions from 1.3867 are merely a corrective pattern within the broader uptrend from 1.0351 (2022 low). With 1.3008 support intact, medium-term bullishness is maintained, and a break of 1.3867 is in favor for a later stage, towards 1.4248 key resistance (2021 high).
Risk to watch: A close below 1.3453 would signal that UK political risk is overriding the broader dollar trend and could accelerate sterling losses.
The Yen experienced significant intraday volatility. Initially, the currency weakened alongside rising oil prices, continuing the recent pattern where higher energy costs pressure Japan’s import-heavy economy. This dynamic has been a consistent headwind for the Yen whenever oil spikes. The BOJ’s April meeting summary, released earlier, showed a more hawkish debate, with several policymakers discussing another rate hike as the oil shock lifts inflation risks. Markets are pricing a potential move as early as June.
The Yen later rebounded strongly after US Treasury Secretary Scott Bessent reaffirmed that both the United States and Japan believe excessive currency volatility is undesirable. Speaking after meeting Prime Minister Sanae Takaichi, Bessent said Washington remained in close contact with Japanese authorities on exchange rate developments. He expressed confidence that BOJ Governor Kazuo Ueda would successfully avoid falling behind the curve on inflation. The remarks were interpreted by markets as broad US support for Japan’s recent Yen-buying intervention efforts. The comments followed similar remarks earlier from Japanese Finance Minister Satsuki Katayama, who confirmed close coordination with Washington on currency market developments.
European equity markets traded lower, with the FTSE down 0.30%, DAX down 0.95%, and CAC down 0.57%. Earlier in Asia, the Nikkei rose 0.52%, while Hong Kong’s HSI fell 0.22% and China’s Shanghai SSE fell 0.25%. The mixed performance reflected a market that is not yet in full risk-off mode. The AI investment theme and semiconductor demand provided a floor under sentiment, preventing a deeper equity selloff that would have amplified dollar gains.
The Trump-Xi summit on Thursday is the next major event that could resolve or escalate the Hormuz crisis. A de-escalation would likely send oil prices lower, reduce inflation fears, and unwind some of the hawkish Fed premium currently priced into the dollar. An escalation, conversely, would push oil higher, reinforce the inflation narrative, and potentially trigger a more aggressive safe-haven bid for the dollar. Until that outcome is known, the dollar is likely to stay bid and range-bound, with risk appetite acting as a counterweight.
What this means: The dollar’s path hinges on whether the summit delivers a diplomatic off-ramp for oil markets. Without one, the 28% hike probability could rise further, dragging the dollar with it.
The dollar’s strength this week is built on two pillars: elevated oil prices and a hawkish Fed repricing. Both are directly linked to the unresolved Strait of Hormuz situation. Thursday’s Trump-Xi summit will either validate those pillars or knock them down. For sterling, the immediate focus is whether Starmer can survive the internal party pressure; a further resignation would likely break the 1.3453 support in GBP/USD. For the yen, the combination of oil sensitivity and an implicit US intervention backstop creates a wide yet bounded range. Traders should watch the summit headlines and any further UK political developments as the next concrete catalysts.
Drafted by the AlphaScala research model and grounded in primary market data – live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.