The Dollar index held on to last week’s gains ahead of the US May CPI release, with markets focused on whether core inflation keeps Federal Reserve rate-hike expectations alive into December. Headline CPI is forecast to move back above 4.0% year on year for the first time since May 2023, while core CPI is seen rising 0.3% month on month and 2.9% year on year, against 2.8% previously. A softer 0.2% monthly core reading is flagged as the main downside risk, which could pull short-dated yields lower and weigh on the Dollar.
Higher US real rates have continued to unwind last year’s Dollar debasement trade, adding pressure to Gold, Bitcoin and the Swiss Franc. Key levels being watched include $4,100/oz for gold and $60,000 for bitcoin, alongside a firmer USD/CHF as a vehicle for the move. With upside risks to energy prices and attention turning to tomorrow’s PPI and next week’s FOMC, DXY is seen supported on pullbacks: a soft core print could test 99.50/60, while the near-term path is towards 100.40/50.
Dollar Strength and the Impact of Core Inflation Readings
The Dollar is holding its recent gains as everyone watches for the May CPI data, which is due this Friday. We expect a firm core inflation reading to keep the market pricing in a potential Federal Reserve hike before year-end. This continued strength in US real rates is putting pressure on trades that worked when the dollar was weaker, such as long positions in gold and crypto.
The key release will be the May 2026 CPI report, where we anticipate core inflation rising 0.4% for the month. This would push the annual rate to a stubborn 2.7%, well above the Fed’s target and reinforcing the “higher for longer” narrative. This follows last week’s robust jobs report, which showed payrolls expanding by a solid 215,000, giving the Fed little reason to consider cutting rates.
Strategies and Key Levels in a Rising Dollar Environment
Given this outlook, we are looking at options strategies that benefit from a rising DXY. Buying near-term call options on the Dollar Index provides direct exposure to this expected upward move. The implied volatility ahead of the CPI release could make these options valuable, especially if the data comes in hot as anticipated.
We’re also watching for key support levels in other assets to break, confirming this dollar strength. Look for put buying opportunities in gold if it approaches the $2,500 level, or in bitcoin as it re-tests the $95,000 mark. A rising USD/CHF continues to be a primary way we are expressing this view on a stronger dollar.
The main risk to this view is a softer-than-expected core CPI, perhaps a 0.2% monthly print, which could see the DXY dip to test the 104.80 area. However, with persistent inflation and a data-dependent Fed, we see dips as buying opportunities. Our focus remains on the DXY trending towards the 106.50 level in the coming weeks.
