• USD/CHF gains ground as geopolitical tensions in the Middle East keep the US Dollar supported.
• Iran warns it “will respond,” accusing the United States of violating the ceasefire in the Hormozgan region.
• Markets continue to price in higher-for-longer Federal Reserve expectations amid elevated Oil prices.

USD/CHF trades with a mild positive bias on Tuesday as renewed military escalation between the United States (US) and Iran supports the US Dollar (USD), pressuring the Swiss Franc (CHF). At the time of writing, the pair is trading around 0.7850, up 0.30% on the day and snapping a four-day losing streak.

American forces carried out “defensive strikes” in southern Iran on Monday, targeting missile facilities and Iranian boats allegedly attempting to deploy naval mines near the Strait of Hormuz. Meanwhile, Iran’s Islamic Revolutionary Guard Corps (IRGC) claimed it had downed a US MQ-9 Reaper drone after it entered Iranian airspace.

In a statement shared by Iran’s IRIB broadcaster, Iran’s Foreign Ministry accused the United States of violating the ceasefire in the Hormozgan region and warned that Tehran “will respond and will not hesitate to defend itself.”

Despite the renewed military escalation, diplomatic efforts between Washington and Tehran continue. US Secretary of State Marco Rubio said on Tuesday that negotiations over a potential deal with Iran could “take a few days,” while stressing that the Strait of Hormuz “has to be open” and “will be open one way or another.”

The Strait of Hormuz remains largely closed, keeping a geopolitical risk premium embedded in global Oil prices and fueling inflation concerns worldwide. Inflation in the United States has accelerated sharply since the war began, reinforcing expectations that the Federal Reserve (Fed) may keep interest rates higher for longer, with traders increasingly pricing in the possibility of another rate hike by the end of the year.

In Switzerland, inflation rose to its highest level in 16 months in April, though it remains within the Swiss National Bank’s (SNB) 0%-2% target range. The SNB is expected to maintain its current policy stance, as the inflationary impact from higher Energy prices has been partly offset by the strength of the Swiss Franc, which helps make US Dollar-denominated commodities such as Oil cheaper in local currency terms.

Although SNB Vice Chairman Martin Schlegel said last week that the central bank maintains an “elevated willingness” to intervene in foreign exchange markets if necessary.

On the data front, traders will closely monitor the US Conference Board (CB) Consumer Confidence report later on Tuesday, followed by Switzerland’s ZEW Survey – Expectations data for May on Wednesday and the US Personal Consumption Expenditures (PCE) inflation report on Thursday.