TD Securities’ US economic outlook points to a higher-for-longer Federal Reserve stance, a backdrop that tends to support the US Dollar. It expects output growth to move sideways this year as the Iran conflict weighs on activity, while stagflationary pressures from elevated oil prices and stressed supply chains keep policymakers on hold through the year. The firm also flags AI-driven demand and high-income consumer spending as factors underpinning underlying growth.
On prices, TD Securities says the Iran conflict stalemate, high oil and supply disruptions mean inflation progress is unlikely this year. It forecasts core CPI inflation peaking at 3.0% year on year in Q4 2026 and ending 2026 higher than it started, adding that core PCE measures are similarly elevated. It expects most of the oil shock to pass into headline inflation, with gradual disinflation and renewed easing only returning in 2027, while acknowledging uncertainty around Iran and the Trump administration’s trade, fiscal, regulatory and immigration agenda.
Federal Reserve Policy and Inflation Backdrop
Given the outlook, we see the Federal Reserve remaining on hold for the rest of 2026, which should keep the U.S. Dollar well-supported. Recent commentary from the latest FOMC minutes confirms a cautious stance, with several members noting that disinflation has stalled. This higher-for-longer rate environment is the central theme we are positioning for in the coming weeks.
The stagflationary pressures from the ongoing conflict in Iran are tangible and are keeping markets on edge. We’ve seen West Texas Intermediate (WTI) crude oil consistently trading above $95 a barrel this month, directly impacting input costs. This, combined with a recent uptick in the Global Supply Chain Pressure Index, suggests inflation will remain sticky.
Recent data reinforces this view, as the April 2026 Consumer Price Index (CPI) report came in at a stubborn 2.8% year-over-year, surprising analysts who had hoped for further cooling. This makes it highly unlikely the Fed will consider easing monetary policy anytime soon. In fact, we see core inflation actually rising toward 3.0% by the end of the year.
Market Strategies and Historical Parallels
For derivative traders, this points toward strategies that benefit from a strong dollar and persistent interest rate volatility. We are considering long positions in the U.S. Dollar Index (DXY), which is already hovering near 106.50, through futures contracts or call options. Simultaneously, we see value in options that bet against significant rate cuts, such as buying puts on Treasury futures.
Historically, periods of geopolitical tension and high energy prices, such as the late 1970s, have led to prolonged periods of dollar strength and elevated rates. We anticipate a similar dynamic playing out, where volatility remains a key feature of the market. Therefore, maintaining long volatility positions, possibly through VIX call options, could serve as a useful hedge against any sudden escalations.
