US Inflation and Market Reactions
ING strategists, including Francesco Pesole, Frantisek Taborsky, and Chris Turner, forecast a 0.9% month-on-month increase in the U.S. consumer price index (CPI), with the core inflation likely to exceed expectations at 0.3% month-on-month. They suggest that this could lead to a more hawkish stance affecting the dollar but note that the dollar’s gains will largely hinge on the stock market’s reactions and the ongoing U.S.-Iran negotiations, which they believe are providing medium-term support for the dollar.
Inflation Data and Market Dynamics
Recent data on U.S. CPI shows an anticipated 0.9% month-on-month increase, maintaining the same rate as last year, which would elevate the year-over-year inflation to a notable 4.0%. This figure is significantly above the consensus prediction of 0.6% month-on-month and 3.7% year-over-year. In contrast, the core CPI forecast aligns with expectations at 0.3% month-on-month and 2.7% year-over-year. The primary drivers for this uptick are expected to be gasoline and diesel prices, although a rebound in recreational and medical costs is also anticipated. A core monthly increase of 0.3% is something to watch.
That said, it might still be premature to anticipate clear signs of second-round effects from this data. A stronger-than-expected headline CPI could potentially amplify the recent hawkish adjustments seen in the USD swaps curve. The Federal Reserve appears poised to implement around 7 basis points of tightening by the year’s end.
However, the dollar’s positive momentum may depend more on market sentiment than on interest rates alone. The global risk landscape seems to influence certain USD crosses, such as EUR/USD, more than short-term interest rate variations or oil prices. Historically, favorable days for the dollar often correlate with downturns in equities.
Despite these figures, developments regarding Iran are likely to overshadow CPI discussions. Recent events have underscored the significant gaps between the U.S. and Iran on critical nuclear deal points. Meanwhile, markets are hesitant to factor in an escalating situation, even as President Trump’s comments suggest a fragile ceasefire and increasing military actions in the Strait of Hormuz.
If this deadlock persists, it could jeopardize the dollar’s short- and medium-term gains. Over the longer term, prolonged uncertainty could be detrimental to the global economy, which typically sees a negative correlation with the dollar.
