The US dollar retains upside risk as markets await May CPI, with the disinflation trend described as stalled. Fed funds futures fully price a 25 bps hike by year-end to a target range of 3.75–4.00%, and almost 50 bps of tightening over the next twelve months, keeping focus on the Federal Reserve’s policy path.
May CPI is due at 1:30pm London and 8:30am New York. Headline CPI is forecast to rise 0.5% m/m versus 0.6% in April, lifting the annual rate to 4.2% y/y from 3.8%, while core CPI is seen at 0.3% m/m versus 0.4% and 2.9% y/y versus 2.8%. Markets have largely shrugged off renewed US-Iran strikes: crude is consolidating near recent lows and bond yields are only marginally higher, while the USD is mixed—down mainly against NOK and firmer versus AUD, ZAR, SEK and NZD.
Strong Inflation and Labor Market Support Dollar Upside
We believe the US Dollar is positioned to strengthen in the coming weeks. The core reason is that inflation has remained stubbornly above the Federal Reserve’s target, while the American labor market continues to show surprising strength. This combination makes it likely the Fed will maintain its restrictive policy stance for longer than markets had previously anticipated.
The most recent data from May 2026 supports this view, with the Consumer Price Index (CPI) showing a year-over-year increase of 3.1%, stalling the disinflationary progress from last year. Furthermore, the economy added a robust 220,000 jobs in May, keeping unemployment low at 3.8%. In response, rate-futures markets have pushed back expectations for cuts, now pricing in only one 25 basis point reduction by year-end.
Trading Strategies in a Dollar-Positive Environment
For derivative traders, this environment suggests setting up positions that will benefit from a rising dollar. We see opportunity in buying call options on the US Dollar Index (DXY) or on USD against currencies like the Australian Dollar and New Zealand Dollar, which are sensitive to US interest rate policy. Options strategies could be particularly effective as they can also capitalize on any pickup in market volatility heading into the next Fed announcements.
This current stall in falling inflation is reminiscent of the dynamic we observed in 2023, where the final push to the 2% target proved to be the hardest part of the journey. For now, the market seems to be focused almost exclusively on this theme, with other inputs like fluctuating oil prices having only a minor impact. The main driver for the dollar will be expectations around the Fed’s next move.
