TD Securities said a softer US core CPI reading led to only modest US Dollar weakness, leaving the broader uptrend intact. May consumer price inflation matched consensus, with the headline index rising 0.5% m/m (0.473% before rounding; TD: 0.48%, consensus: 0.5%), which the note linked to the lingering effect of high crude prices, alongside gasoline up 7% m/m. Core CPI increased 0.2% m/m (0.208% before rounding; TD: 0.23%, consensus: 0.3%), with the slowdown attributed to normalisation in OER and rents after an April surge.
The firm pointed to last week’s upside payrolls surprise and escalating US/Iran conflict headlines as supportive for the USD. Its baseline calls for the US Dollar Index (DXY) to remain elevated around 99.86–100.00 into next week’s FOMC meeting, where it expects Chair Warsh’s forward guidance to shape the next directional move.
Short-Term Dollar Weakness and Market Resilience
We see the minor dollar weakness following this morning’s softer-than-expected core CPI as a temporary dip. The underlying strength is clear, especially after last week’s robust jobs report showed the economy added 210,000 payrolls, beating expectations. This resilience, combined with ongoing trade tensions in the South China Sea, should keep the dollar well supported.
Positioning for a Dollar Rally and Policy Signals
This presents an opportunity to position for a continued dollar rally into the Federal Reserve meeting next week. We are considering buying near-term call options on the U.S. Dollar Index (DXY) with strike prices above the current 106.50 level. Selling out-of-the-money puts is also a viable strategy to collect premium while waiting for the uptrend to resume.
Historically, even with cooling inflation, a resilient labor market has kept the Fed from signaling significant rate cuts, a pattern we saw repeatedly through 2024 and 2025. The market seems to be under-pricing the chance that Chair Powell’s guidance remains firm against inflation. Therefore, any hawkish surprise could trigger a significant breakout for the dollar.
