US Dollar Weekly Forecast: The final stage of the inflation fight could be the hardest one

The week that was

Quite a week for the US Dollar (USD). The currency posted gains in every session since Monday, pushing above the key 99.00 hurdle by Friday and reopening the door to a potential revisit of the psychological 100.00 barrier sooner rather than later.

Indeed, the US Dollar Index (DXY) has just posted its strongest weekly performance in over a month, supported by another batch of resilient US data and inflation figures that came in much hotter than expected in April.

Retail Sales, weekly Initial Jobless Claims, Industrial Production and Manufacturing Output all reinforced the idea that the US economy is not slowing fast enough to give the Federal Reserve much room to relax.

The Greenback’s rally was mirrored across the US rates complex, where Treasury yields climbed back to levels last seen during the summer of 2025 across multiple maturities.

At the heart of the move was a sharp repricing of Fed expectations. Markets spent much of the past few months debating when rate cuts would begin. This week, the conversation shifted toward something far less comfortable: whether the Fed may eventually need to tighten again.

Fed speakers lean “higher for longer” as inflation worries persist

This week’s Fed commentary carried a clear message: inflation is no longer moving comfortably in the right direction.

After hotter Consumer Price Index (CPI) and Producer Price Index (PPI) data, officials sounded increasingly concerned about sticky services inflation, energy shocks, supply-chain disruptions and the risk of inflation expectations becoming unanchored.

Importantly, policymakers did not sound eager to rush into another rate hike. But several officials made clear that keeping rates unchanged may not be enough if inflation continues to drift higher in the coming months.

For the US Dollar, that matters enormously.

A Fed forced to keep policy restrictive for longer, or even reopen the door to additional tightening, keeps US yields elevated and makes it far more difficult for markets to justify aggressive rate-cut expectations later in the year.

Fed officials

Austan Goolsbee (Chicago, non-voter) sounded increasingly uneasy about the inflation backdrop after the hotter-than-expected CPI report. He warned that inflation was moving in the wrong direction beyond just Oil and tariffs, pointing specifically to rising services inflation as a concern.

Susan Collins (Boston, non-voter) delivered one of the clearest hawkish messages of the week. She said a restrictive policy may need to remain in place for some time and acknowledged that another rate hike could become necessary if inflation pressures persist, particularly if energy prices remain elevated due to the Middle East conflict.

Neel Kashkari (Minneapolis, voter) maintained a firm anti-inflation stance, arguing that the Iran shock and the closure of the Strait of Hormuz had materially worsened the inflation environment. He stressed that the Fed remains “dead serious” about returning inflation to 2%.

John Williams (New York, voter) struck a more balanced tone. While acknowledging inflation risks and emerging supply-chain pressures, he argued that monetary policy is already mildly restrictive and currently in a good place, adding that he sees no immediate reason to raise or cut rates.

Michael Barr (Fed Board, voter) focused more heavily on financial stability and the Fed’s balance sheet, warning against shrinking reserves too aggressively or weakening liquidity requirements. On policy, he remained cautious ahead of the June Federal Open Market Committee (FOMC) meeting.

Tone check

The overall tone was clearly hawkish, though not in a straightforward “hike now” fashion.

This week felt more like the Fed collectively acknowledging that the inflation backdrop has become more complicated again. Officials repeatedly referenced sticky services prices, energy-related upside risks, supply disruptions and the possibility that inflation may remain elevated for longer than previously expected.

At the same time, policymakers still do not appear convinced that the labour market is overheating. Several officials described employment conditions as stable, lukewarm, or no longer especially tight, reducing the urgency for immediate action.

Still, for markets, the direction of travel has shifted noticeably.

Rate cuts are becoming harder to justify, while additional tightening is no longer being dismissed outright.

Inflation remains well above target

As widely expected, inflation accelerated sharply in April.

Headline CPI rose 3.8% YoY, up from March’s 3.3% gain, while core inflation, which excludes food and energy, accelerated to 2.8% from 2.6%.

The return of price pressures suggests that the disinflationary trend seen earlier this year may already be fading.

The geopolitical events, especially the robust recovery in crude Oil prices in the face of the continued closure of the Strait of Hormuz, have brought a new round of inflationary pressure just as markets were becoming more comfortable with the general price outlook.

Meanwhile, the lagged impact of US tariffs is only just starting to filter through supply chains and consumer prices, raising the risk that inflation could remain sticky for longer than anticipated.

That’s exactly the combo markets fear most: disinflation slowing but the economy still holding up.

Job creation remains resilient

The latest report on the US labour market showed the economy added 115K jobs in April, comfortably beating expectations and adding to March’s upwardly revised 185K increase.

Meanwhile, the Unemployment Rate held steady at 4.3%.

Wage pressures also continued to edge higher, with Average Hourly Earnings rising 3.6% YoY from 3.4% previously, reinforcing concerns that underlying inflation pressures remain difficult to fully eliminate.

The broader takeaway is that the labour market is cooling, but not fast enough to force the Fed into a dovish pivot anytime soon.

Positioning continues to support the US Dollar

Non-commercial net longs in the US Dollar fell back to around 700 contracts in the week ending May 5, according to the latest Commodity Futures Trading Commission (CFTC) data.

Even so, speculative accounts maintained bullish Dollar exposure for an eighth consecutive week, while open interest rose after several weeks of declines.

That positioning dynamic matters.

Despite months of market discussions around eventual Fed easing, speculative flows have never fully abandoned the Dollar. This week’s rebound in yields and Fed repricing may now encourage investors to rebuild bullish exposure more aggressively.

Technically, the DXY still appears trapped within a broader consolidation range, but the latest price action increasingly resembles accumulation rather than exhaustion.

What’s next for the US Dollar

Next week, all eyes will turn to the release of the FOMC Minutes, which could offer deeper insight into policymakers’ growing concern about inflation even before the latest CPI and PPI surprises.

Investors will also continue monitoring developments surrounding the Middle East conflict, Oil prices and the Strait of Hormuz, all of which are rapidly becoming central variables in the Fed outlook.

Meanwhile, Fed speakers are expected to remain highly active.

After this week’s inflation shock, markets will be listening more carefully than they have in months.

The US Dollar may have found its floor

For much of 2026, markets operated under the assumption that the next major move from the Federal Reserve would eventually be lower rates.

That assumption is now being challenged.

The combination of sticky inflation, resilient economic activity, elevated Oil prices and renewed supply-chain disruptions has materially complicated the Fed’s path back toward easing. More importantly, officials no longer sound fully confident that inflation will continue cooling on its own.

That does not necessarily mean the Fed is about to deliver another hike immediately.

But it does suggest the bar for rate cuts has moved significantly higher.

In practical terms, that environment should continue supporting US Treasury yields and, by extension, the US Dollar.

The DXY may now be entering a broader recovery phase after spending months consolidating near multi-month lows. If inflation remains elevated and the Middle East conflict continues disrupting energy markets, a move back above the 100.00 barrier could become increasingly likely in the weeks ahead.

For now, the Dollar’s biggest support may simply be this:

The market may have underestimated how difficult the final stage of the inflation fight was always going to be.