Key Takeaways:
The dollar is pushing higher as traders await US inflation data and hawkish signals from Federal Reserve Chair Kevin Warsh's first congressional testimony.
The dollar edged higher ahead of US inflation data Tuesday, with traders pricing a coin-flip chance of a Federal Reserve rate hike this month as oil prices surge and hawkish commentary from policymakers mounts.
"A core CPI reading of 0.3% or higher would likely imply the Fed's preferred core PCE deflator is also running at 0.3% or above, which may well be a trigger for a rate hike as early as the July meeting," said Ray Attrill, head of FX strategy at National Australia Bank.
The Bloomberg Dollar Index steadied near 101.27 after gaining in recent sessions, while the 10-year Treasury yield climbed to 4.62%, the highest since May. Two-year yields, more sensitive to rate expectations, rose seven basis points to 4.28%, the highest since February 2025. The euro traded at $1.1383 and sterling at $1.3347, while the yen held at 162.40 per dollar, keeping traders on alert for possible intervention from Tokyo.
The data arrives as Fed Chair Kevin Warsh prepares for his first semiannual testimony before Congress this week, and after Governor Christopher Waller said rates may need to rise "in the near term" if inflation remains above the central bank's 2% target. Money markets now price about 30 basis points of rate hikes this year, with a nearly 50% probability of a quarter-point increase at the July 29 meeting, up from less than 40% earlier in the session.
The inflation outlook has darkened as energy costs accelerate. The headline consumer price index rose to 3.8% over the 12 months through April, while core CPI climbed to 2.8%, according to the latest available data. The energy component of CPI jumped to 17.53%, reflecting the surge in oil prices after the US and Iran exchanged fresh missile and drone strikes over the weekend. Brent crude jumped as much as 9.9% Monday, with both WTI and Brent futures rising more than 2% in early Tuesday trading.
The gap between headline and core inflation signals that price pressures are still spreading through the economy. Core inflation typically lags headline as companies take time to pass higher fuel, transport and input costs to consumers. The producer price index rose to 6% in April, with core PPI at 5.2%, indicating that businesses are absorbing rising costs across supply chains.
Economists expect June's core CPI to show 0.2% growth month on month, according to a Bloomberg survey. A hotter print would strengthen the case for a July rate increase, particularly with Warsh's testimony giving the Fed chair a platform to signal the policy path. The last time the Fed faced a similar inflation trajectory was in early 2023, when the central bank delivered consecutive quarter-point hikes before pausing as price pressures eased.
For the dollar, higher rates would widen the yield advantage over major peers, supporting the DXY's push toward $103. A break above that level would open the door to the 100.50-to-102 range, according to technical analysis. Conversely, a soft CPI reading could trigger a dollar sell-off, providing relief to the euro, sterling and yen, all of which have been under pressure from the greenback's strength.
This article is for informational purposes only and does not constitute investment advice.
