US: Growth normalizes as Iran shock fades – TD Securities

FXStreet Insights Team FXStreet

TD Securities strategists Oscar Munoz and Eli Nir project output growth gradually slowing to potential by late 2026 as Iran-related stagflationary risks keep the Federal Reserve (Fed) cautious. Gross Domestic Product (GDP) is expected to return close to potential with 1.9% Q4/Q4 growth in 2026, unemployment near 4.3%, core Consumer Price Index (CPI) peaking around 3.0% y/y in Q2 2026, and disinflation resuming in the second half of 2026.

From stagflation risk to disinflation

"We expect output growth to gradually come down to potential by the end of this year, reflecting the conflict in Iran. The conflict presents stagflationary risks which we expect will keep the Fed on hold for most this year. Larger tax refunds could help consumers weather the storm of higher gasoline prices."

"GDP growth will likely return close to potential in 2026, ending with 1.9% Q4/Q4. Growth will likely be front loaded due to a rebound in government consumption post shutdown. A normalization in growth should result in a still-low unemployment rate of 4.3% by Q4 2026."

"Higher energy prices along with still-high tariffs should lead to a boost in consumer prices in the near term. We see core CPI inflation peaking at 3.0% y/y for Q2 2026. The numbers are similar in core PCE terms."

"Most of the impact of higher oil prices will filter into headline inflation. We expect disinflation to resume in H2 2026."

"We assign 30% odds to a US recession over the next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD edges higher as hot CPI inflation and hawkish RBA lift rate hike bets

The AUD/USD pair gathers strength to near 0.7035 during the Asian trading hours on Friday. The Australian Dollar edges higher against the US Dollar as hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia rate hikes.

USD/JPY meets support near 157.00

USD/JPY retreats for the third consecutive day on Friday, revisiting the 157.00 region before attempting some recovery as investors continue to assess the latest BoJ meeting, where the central bank left rates unchanged, as widely anticipated.

Gold sinks to fresh yearly lows despite risk-off mood as Fed rate hike bets weigh

Gold slips to fresh year-to-date lows on Friday. The metal struggles despite a risk-off mood across markets, as expectations of further Federal Reserve (Fed) interest rate hikes continue to dominate price action, leaving Gold on track to end the month in negative territory.

Ripple Price Forecast: XRP bulls defend $1.20 as sell-side pressure triggers liquidations

Ripple (XRP) trades around $1.25 on Friday, rising from a short-term support level established at $1.20. This minor upward correction follows a sharp sell-off, triggered amid reports of a hack attack on the Binance exchange that impacted approximately $6.3 billion. The attack drove the broader crypto market on edge, as Binance suspended both deposits and withdrawals to contain the situation.

BoJ recap: A pause for now... but Japan has entered a new inflation phase

The Bank of Japan left its short-term policy rate unchanged at 1.25% but delivered a distinctly hawkish message on the risk of an inflation overshoot. The decision passed by 8-1, with board member Takata dissenting in favour of an increase to 1.5%, while Governor Kazuo Ueda stressed that the Bank would continue adjusting policy as needed.

The 2% inflation target came from a throwaway remark. It now moves trillions

The Federal Reserve's 2% inflation goal grew out of an off-the-cuff remark by a New Zealand politician in 1988. Bond investors still price long-term US debt as if 2% holds, so a change in how the Fed measures inflation would move markets.