The US Dollar Index is consolidating at elevated levels during the Asian session on Tuesday, currently trading near 101.20.
The greenback is pausing after two consecutive days of gains, with buyers taking a wait-and-see approach ahead of the US CPI data and Federal Reserve Chair Wash's congressional testimony scheduled for Tuesday.
Tuesday's release of US CPI data for June is anticipated to show the first monthly decline in headline inflation since the pandemic. Market consensus expects a 0.2% month-on-month drop in the CPI, entirely driven by a 15% fall in gasoline prices between mid-May and late June. The annual rate is forecast to ease to 3.8% from 4.2% in May.
However, this surface-level improvement masks deeper underlying price pressures. Core CPI, which excludes food and energy, is projected to dip only slightly to 2.8% from 2.9% in May, having started the year at 2.5%. Services inflation is running at an annual rate of 3.4%, up from 2.9% in January and significantly above the 2010-2019 average of 2.6%.
This combination presents a difficult balancing act for Fed Chair Wash in his first congressional testimony this week. He must demonstrate a serious commitment to tackling inflation while avoiding an overly hawkish stance that could unnecessarily tighten credit conditions, with the evolving situation in the Middle East adding two-way risks to energy prices.
Headline CPI: Gasoline Price Drag Dominates
Economists forecast a 0.2% month-on-month decline in the US CPI for June, which would mark the first monthly drop since the pandemic. The decrease is entirely attributed to a 15% fall in gasoline prices between mid-May and late June. The annual rate is expected to retreat to 3.8% from 4.2% in May, which was itself the highest reading since April 2023.
This improvement appears more like a "gasoline story" rather than a genuine, broad-based disinflationary trend.
As one economist noted, "The decline in the headline reading is almost entirely a gasoline story, not a true broadening of disinflation, which is why the core reading is more important for markets than the headline number."
Core and Services Inflation: Persistence Remains
Core CPI, excluding food and energy, is expected to have risen 0.2% in June. The annual rate is projected to edge down only modestly to 2.8% from 2.9% in May, compared to 2.5% at the start of the year. This persistence is primarily driven by services inflation, which covers items like rent, car repairs, entertainment, and dining out. Services inflation is running at an annual rate of 3.4%, higher than the 2.9% in January and well above the 2.6% average for 2010-2019.
Residual effects from previous tariffs may have added costs to some goods categories, but services, largely unaffected by tariffs and energy prices, remain the more stubborn part of the inflation picture.
It is noteworthy that some economists point out the World Cup may have provided a temporary boost to services costs in June by increasing demand for hotels, airfare, restaurants, and tickets.
Energy Outlook: Geopolitics a Key Variable
The energy backdrop remains fluid. During the Asian session Tuesday, oil prices rose to around $79 per barrel after a fragile ceasefire between the US and Iran broke down, with both sides resuming military strikes.
However, oil prices remain well below the peak of around $119 per barrel seen early in the conflict and are not far from pre-conflict levels of about $65 per barrel. The scope for further significant increases appears limited unless hostilities escalate enough to threaten the closure of the Strait of Hormuz, a critical oil transit chokepoint.
Wash's Challenge: Striking a Balance in Testimony
All of this creates a difficult balancing act for new Fed Chair Wash, whose nomination was partly based on expectations for lower borrowing costs, during his first congressional testimony.
He must show a firm commitment to addressing inflation while avoiding policy moves that overly tighten conditions and further increase credit costs. This calibration will depend heavily on how the situation in the Middle East and its impact on oil prices evolves. With both core and services inflation measures still well above the Fed's comfort zone, there is considerable market doubt about whether inflation will slow sufficiently quickly to allow the central bank to avoid further rate hikes.
Market Outlook
Looking ahead, the short-term trajectory of the US Dollar Index will depend heavily on the outcome of Tuesday's US CPI data and Fed Chair Wash's congressional testimony.
Should the inflation data come in stronger than expected, it would reinforce expectations for Fed rate hikes, potentially allowing the dollar to retest the 101.50 or even 101.70 area. Conversely, if the data is soft or Wash delivers a dovish-leaning message, the dollar could see a further pullback toward the 101.00 or even 100.80 region.
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