US CPI Hits 4.2%, Core Slows – Dollar Path Forward

TD Bank attributed part of the headline acceleration to the ongoing Iran war, which has pushed gasoline prices higher and started to spill into other categories. Airfares have risen more than 8% since the conflict began, layering on top of tariff effects and already elevated services inflation (excluding shelter). The bank expects core measures to stay elevated through the end of the year before drifting lower in the first half of 2027. That profile, they said, supports an extended pause from the Federal Reserve. At next week's FOMC meeting the committee is likely to drop its easing bias, and the median dot plot could show an upward drift in the funds rate forecast. The current median projects 25 basis points of cuts this year and another 25 in 2026; traders will be watching whether those numbers get revised higher.

For the dollar, the transmission is straightforward. A Fed that signals a long hold keeps short-term yields elevated relative to other developed markets, which underpins the greenback against the euro, sterling, and yen. The EUR/USD pair remains under pressure, with the single currency struggling to break higher on any improvement in risk appetite as long as the rate differential favors the dollar. Sterling faces a similar headwind, though its own inflation dynamics will also matter. The geopolitical uncertainty around the Middle East adds a safe-haven bid to the dollar, reinforcing the rate-driven support.

The inflation data also matters for risk assets. Higher-for-longer rates typically weigh on growth equities and cryptocurrencies, which benefited from the earlier expectation of cuts. Gold, sensitive to real yields, faces headwinds from a Fed in pause mode. The offset is that core inflation is not accelerating – the May print showed a clear deceleration from April – so the worst-case scenario of a reacceleration has been avoided. That leaves markets in a waiting game: the FOMC's dot plot next Wednesday will set the tone for the rest of the quarter.

The committee meets Tuesday and Wednesday. The statement and the median rate projection will determine whether the dollar rally has room to extend or whether a more cautious Fed sets the stage for a turn.