The US dollar rose sharply on Monday due to concerns about potentially higher-than-expected CPI data. MUFG has warned that a faster rebound in US inflation could hinder the Federal Reserve’s plans to cut interest rates in September. This week, analysts are paying close attention to the CPI and PPI data for July, looking for signs of how tariffs are affecting prices. MUFG notes that any unexpected rise in inflation may not only delay rate cuts but could also reverse the US dollar’s recent decline.

Impact of Possible Rate Cuts

Many experts are worried about how potential rate cuts might affect long-term rates. For instance, Goldman Sachs believes that tariff-related price increases could rise by 70%. Similarly, JPMorgan warns that stagflation could limit bond gains and impact the dollar. Observers are also considering Bank of America’s view against a September rate cut, pointing to inflation that is still above target due to tariff hikes. Meanwhile, Citi mentions that a higher CPI could complicate the Federal Reserve’s dual mandate. The US dollar’s strong jump today, August 11th, indicates that some traders are betting against a September rate cut. There’s growing speculation about a surprise inflation rebound, bringing attention to the upcoming July Consumer Price Index (CPI) data. Last week, futures markets showed over a 70% chance of a September cut, but that has since dropped to about 50-50. This uncertainty makes sense, especially considering that core inflation was at 3.1% in the June 2025 report, still above the Fed’s target. A high CPI reading for July could push expectations for rate cuts back to December or even into 2026. For derivative traders, this rising uncertainty means more market volatility is likely in the coming weeks. The VIX, which measures market fear, has already increased from near 13 to over 15. Traders might buy options, like straddles on major indices, to profit from the expected price swings around data releases.

Traders and Market Volatility

The dollar’s strength is a key focus, leading to increased interest in call options on dollar-tracking ETFs like UUP. However, the threat of higher inflation and a cautious Fed makes government bonds less appealing. Traders may consider using put options or shorting bond futures to guard against rising long-term interest rates. A similar scenario occurred in 2022 when inflation turned out to be more persistent than expected. The Fed had to hike rates aggressively, catching many off guard and resulting in significant losses in both stock and bond portfolios. The lesson from that time is that underestimating inflation surprises can lead to costly errors. Adding to the worries are the recently increased tariffs, which are likely to impact consumer prices. Major retailers have indicated they will pass these costs on, which could raise inflation by another half a percentage point this fall. This scenario makes the potential for a hawkish surprise from the Fed even more definite. Create your live VT Markets account and start trading now.

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