US CPI data 'encouraging sign of disinflation', Fed to hold rates steady in 2026 despite market bets

Matthew Ryan, CFA Ebury

Today's inflation data marked a meaningful cooling from May. The improvement in headline inflation reflects the drop in oil prices following the signing of the US-Iran memorandum of understanding, and we're not yet seeing elevated energy prices feed into second-round inflation pressures.

We’d caution against reading the data as the start of a clean, linear path to target given the changing energy backdrop, though this is an encouraging sign of disinflation nonetheless.

The dollar has weakened broadly as markets now see a September Fed hike as far from a done deal. Our view remains that the Fed holds rates this year. While today's data supports that call, the path ahead hinges almost entirely on the state of US-Iran negotiations. Oil prices have surged nearly 20% this month after President Trump cast doubt on the framework peace deal - a move clearly yet to be reflected in the data.

FOMC officials are now caught in an awkward spot between responding to the data in hand or getting ahead of an energy shock that hasn’t yet shown up in the numbers. If peace holds and Trump's latest outburst proves more bark than bite, the Fed should have room to stay patient. If talks deteriorate, a September hike is very much back in play.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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