Rising US inflation expectations and a potential dovish Fed pivot may limit further Dollar strength despite near-term rate hike bets.
Markets are pricing in a prolonged inflation shock tied to Middle East tensions, lifting US inflation expectations beyond a one-year horizon. This shift has bolstered the Dollar on expectations of Fed action, given its reputation for early and aggressive rate hikes during inflationary periods.
Longer-term inflation expectations in the US have climbed since late April, contrasting with 2022 when the Fed moved ahead of the ECB in tightening policy. However, real interest rates and relative inflation trends remain critical factors for sustained Dollar appreciation.
Analysts caution that higher US inflation and a potentially more dovish Fed could cap Dollar gains. Lingering energy market disruptions add further uncertainty to the currency’s outlook.