Brown Brothers Harriman’s (BBH) Elias Haddad notes that the US Dollar retains upside risk as US inflation is expected to heat up in May and the disinflation trend has stalled. Fed funds futures fully price a 25 bps hike by year-end, with nearly 50 bps of tightening over twelve months, as markets focus on May CPI data.

USD supported by firmer inflation outlook

"USD can continue to edge higher as the US macro backdrop of improving labor demand and sticky inflation back a more restrictive Fed policy stance. Fed funds futures fully price in a 25bps rate hike to a target range of 3.75-4.00% by year-end and nearly 50bps of tightening in the next twelve months."

"US May CPI takes the data spotlight today (1:30pm London, 8:30am New York). Headline CPI is expected to rise 0.5% m/m vs. 0.6% in April to be up 4.2% y/y (the most since April 2023) vs. 3.8% in April on higher gasoline prices. Core CPI is seen at 0.3% m/m vs. 0.4% in April or 2.9% y/y vs. 2.8% in April."

"Overall, the US disinflation trend has clearly stalled even when looking at CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core."

"Markets largely shrugged off renewed US-Iran strikes. Crude oil prices are consolidating near recent lows, and bond yields are only marginally higher. USD is mixed, underperforming mostly versus NOK and outperforming largely against AUD, ZAR, SEK, and NZD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)