Alone in the field is not a warrior. A single report on inflation in the United States is unlikely to be enough for the Fed to radically change its mind. The main reason for the rise in consumer prices to a three-year high of 3.8% was the increase in energy costs. Core inflation of 2.8% is still very far from its peak in 2022 for the central bank to rush headlong into tightening monetary policy. Therefore, the reaction of the EURUSD to the April CPI index data was muted.
The conflict in the Middle East has changed the position of the FOMC doves. If earlier they insisted on continuing the cycle of monetary expansion, now they are focusing on the need to avoid raising rates. MUFG believes that Kevin Warsh, who has just been confirmed by the Senate by 51 votes to 45, is unlikely to turn everything upside down. He will insist on easing monetary policy, but most Fed officials will turn a deaf ear to such calls.
The futures market has increased the probability of a federal funds rate hike in 2026 to 36%, shifting expectations of this event from April to March 2027. Investors can be understood. The yield gap between treasuries and TIPS, known as inflationary expectations, has reached 2.7% over the five-year horizon. This is the maximum level since 2022.
As a result, a self-fulfilling prophecy may work out: expectations of higher inflation will force Americans to increase purchases. An increase in domestic demand will lead to an acceleration in consumer prices.
The pigeons’ arguments that the cost of goods is not rising, which means tariffs are non-inflationary, are unconvincing. Prices for services are accelerating, which is even more dangerous. As a result, the yield on U.S. Treasury bonds is rising. Goldman Sachs calls this a “bullish” factor for the US dollar. The combination of high inflation and strong economic growth, coupled with continued concerns about the energy crisis in the Middle East, are raising debt market rates and increasing the attractiveness of the greenback. The bank recommends buying it against the Swedish krona, euro and British pound.
This position seems logical. The oil market is walking on thin ice, which can crack at any moment. Updated estimates from the US Energy Information Administration suggest a reduction in global oil reserves by 2.6 million bpd in 2026, subject to the opening of the Strait of Hormuz by the end of May. This is significantly higher than the previous forecast of 300 thousand bpd. Brent has not reached its potential, and with it the American dollar.
