The Dollar ended the week without establishing a clear direction, despite a genuine shift in the US inflation picture. June CPI and PPI both surprised meaningfully to the downside, reinforcing the view that price pressures had begun to ease more broadly. Yet instead of extending lower, the Greenback stabilized as investors questioned whether the disinflation story would remain intact beyond a single month.
That hesitation reflected the week’s second—and ultimately more forward-looking—development. A renewed escalation in the US-Iran conflict sent oil prices sharply higher, with Brent closing above $88 and WTI reclaiming the $80 level. Because June’s softer inflation was driven in large part by falling energy prices, the rebound in crude immediately raised the prospect that much of that progress could unwind over the next one or two inflation reports. In other words, markets shifted their focus from what inflation had done to what it was likely to do next.
The result was a market caught between conflicting forces. Softer inflation reduced the urgency for further Fed tightening, but higher oil prices simultaneously revived the risk that inflation could accelerate again, preventing rate-hike expectations from fading. That crosscurrent was reflected in currency performance. New Zealand Dollar led gains for the week, followed by Canadian Dollar and Sterling, while Yen finished as the weakest major currency. Dollar settled near the middle of the rankings, a fitting reflection of a market still weighing yesterday’s disinflation against tomorrow’s inflation risk.
Soft CPI and PPI Shifted the Fed Outlook—Temporarily
June’s inflation reports provided one of the strongest pieces of evidence yet that US price pressures were moderating. Headline CPI declined -0.4% mom after rising 0.5% mom in May, pulling the annual rate down from 4.2% yoy to 3.5% yoy, comfortably below market expectations. Core CPI was unchanged on the month, slowing from 2.9% yoy to 2.6% yoy on an annual basis. At the wholesale level, PPI fell -0.3% mom, its largest monthly decline in more than six years, reinforcing the view that pipeline inflation pressures were easing.
The breadth of the slowdown suggested this was more than a one-off statistical fluctuation. After months of sticky inflation, back-to-back downside surprises in both consumer and producer prices prompted investors to reassess the urgency for additional Fed tightening. Fed funds futures reacted swiftly, with the implied probability of a September rate hike dropping from around 70% a week earlier to about 58% immediately after the data.
However, the composition of the inflation slowdown offered an important caveat. Lower gasoline prices accounted for a significant share of the improvement in both CPI and PPI, reflecting a period when tensions in the Middle East briefly eased and oil prices retreated. As energy markets reversed later in the week, investors quickly recognized that June’s encouraging inflation data rested on a foundation that was already beginning to shift. The result was a disinflation story that looked genuine, but also increasingly fragile.
WTI Above $80 Changes the Inflation Narrative
The week’s defining market development may ultimately prove to be not the softer inflation data, but crude oil’s decisive rebound. As the US-Iran conflict intensified, concerns over energy supplies escalated sharply. The conflict expanded beyond previous tit-for-tat exchanges, with strikes targeting bridges, rail infrastructure, telecommunications facilities and an airport inside Iran, while Iranian retaliation spread across Kuwait, Bahrain, Qatar, Oman and a US military position in Syria. Against that backdrop, WTI settled above USD 80 and Brent closed above USD 88, recording their strongest weekly gains since April.
The significance of WTI reclaiming USD 80 lies in what it means for the inflation outlook. June’s disinflation surprise was driven in large part by lower energy prices following a temporary easing in Middle East tensions earlier in the month. Now that crude has retraced those losses, the energy component is likely to move in the opposite direction over coming months. Markets are therefore beginning to question whether June’s encouraging CPI and PPI readings will prove to be the low point rather than the start of a sustained moderation in inflation.
This changing outlook also explains why expectations for another Fed rate hike did not continue falling despite the softer data. Investors have become less focused on what June inflation showed and more concerned about what July and August inflation might look like if oil prices remain elevated. With crude now acting as a renewed source of inflation risk, energy markets—not last month’s economic data—have become the primary driver of Fed repricing and, by extension, the Dollar’s direction.
Fed Keeps the Door Open to Further Tightening
Federal Reserve officials broadly maintained a cautious, hawkish-leaning tone throughout the week, even as June’s inflation reports came in softer than expected. Testifying before Congress, Chair Kevin Warsh rejected any suggestion that the Fed’s job was complete, arguing that inflation remained too high despite recent progress. He also reiterated that monetary policy was “not particularly restrictive,” reinforcing the view that the Committee still sees scope to tighten further if inflation risks intensify.
Governor Christopher Waller echoed that stance. Ahead of the inflation releases, he indicated that another rate hike could be warranted in the near term if CPI and PPI surprised on the upside. While the actual data reduced the immediate case for further tightening, his comments illustrated that the Fed remains highly sensitive to any renewed inflation pressure. Dallas Fed President Lorie Logan stood out as the week’s most hawkish voice, becoming the first Fed official to publicly support another interest rate increase since Warsh became chair.
The overall message from the Fed changed little despite the encouraging inflation data. Policymakers acknowledged the improvement but showed no willingness to signal that rate hikes were off the table. Instead, the Committee appears content to let incoming data—and increasingly, developments in energy markets—guide its next move. With Fed rhetoric offering few surprises, markets have become more focused on whether higher oil prices will eventually force policymakers back toward a more aggressive stance.
Technical Outlook: Dollar Awaits Confirmation from Oil and Yields
Brent crude remains the market’s leading indicator. The advance from 70.14 has taken on the characteristics of a five-wave impulsive rally, pointing to a potential bullish trend reversal. The close above 55 D EMA (now at 85.75) strengthens that interpretation. The next critical test lies at the 38.2% retracement of 119.50 to 70.14 at 89.00, an area that also coincides with the important 90 psychological level.
Decisive break above this 89/90 zone would argue that Brent is already reversing whole fall from 119.50. That would pave the way to 61.8% retracement at 100.64, which is close to 100 psychological level. Failure to overcome 89-90, followed by a break below 83.71, would instead argue that the recent rally was merely a corrective rebound, and has completed.
US 10-year yield dipped to 4.51 but quickly recovered after drawing support from 55 4H EMA (now at 4.51). No change in the outlook that correction from 4.69 has completed at 4.36, and rise from 3.96 is resuming. above 4.62 resistance will affirm this bullish case, and target a retest on 4.62 high.
NASDAQ’s selloff on Friday and break of 55 D EMA (now at 25634.10) suggests that consolidation pattern from 27190.21 is extending with another falling leg. Strong support should be seen around 38.2% retracement of 20690.25 to 27190.23 at 24707.22 to contain downside to bring rebound. However, firm break of this fibonacci level support will argue that it’s not just in a near term correction, but could be in a larger scale one and risk deeper selloff to 61.8% retracement at 23173.23.
Dollar Index’s correction from 101.80 extended lower last week but holds above 38.2% retracement of 97.62 to 101.80 at 100.20, as well as 55 D EMA (now at 100.17). Further rally is still expected. Above 101.32 minor resistance will bring retest of 101.80 first. Firm break there will extend whole rise from 95.55 to 50% retracement 110.17 to 95.55 at 102.86. However, sustained break of 55 D EMA will bring deeper decline back to 97.62 support, and raise the chance of near term bearish reversal.
Outlook: Gulf Developments Likely to Dictate Dollar’s Next Move
The Dollar enters the new week still searching for a decisive catalyst. If the US-Iran conflict continues to intensify, Brent is likely to challenge or break above the $90 threshold, reinforcing expectations that the recent disinflation trend could prove short-lived. Such an outcome would probably lift Treasury yields, strengthen pricing for another Fed rate hike later this year, and provide fresh support for the Dollar.
On the other hand, any meaningful de-escalation that allows oil prices to retrace would revive confidence that inflation is returning to a downward path, encouraging markets to pare back tightening expectations and reopening the door to broader Dollar weakness.
At this stage, the escalation scenario appears marginally more likely. The increasingly coordinated nature of recent military operations and Iran’s widening retaliation suggest the conflict is entering a more dangerous phase than earlier exchanges. Even so, investors have learned over recent weeks that geopolitical developments can change abruptly. The Dollar therefore remains at a crossroads, with its next major move likely to be determined less by Fed rhetoric or scheduled data releases than by whether oil continues to rewrite the inflation outlook.
EUR/USD Weekly Outlook
EUR/USD extended the consolidations pattern above 1.1323 last week and outlook is unchanged. Initial bias remains neutral this week, and with 1.1499 support turned resistance intact, further decline is expected. On the downside, break of 1.1323 will resume the fall from 1.2081 to 100% projection of 1.2081 to 1.1408 from 1.1848 at 1.1175. However, decisive break of 1.1499 will turn bias back to the upside for 1.1621 resistance.
In the bigger picture, focus is back on 38.2% retracement of 1.0176 to 1.2081 at 1.1353. Decisive break there will revive the case of medium term bearish trend reversal after rejection by 1.2 key cluster resistance level. Further fall should be seen to 61.8% retracement at 1.0904. Nevertheless, strong rebound from 1.1353, followed by break of 1.1621 resistance, will retain medium term bullishness.
In the long term picture, 38.2% retracement of 1.6039 to 0.9534 at 1.2019, which is close to 1.2000 psychological level is the key for the outlook. Rejection by this level will keep the multi decade down trend from 1.6039 (2008 high) intact, and keep outlook neutral at best. However, decisive break of 1.2000/19, will suggest long term bullish trend reversal, and target 61.8% retracement at 1.3554.
