What Hotter U.S. Core Inflation Means for Fed Hawks and the Dollar

U.S. core inflation rose 0.3% month on month against a 0.2% forecast, while headline CPI climbed 0.4% versus the 0.3% expected. Hotter U.S. core inflation hands Federal Reserve hawks a stronger case for further rate hikes, and the repricing that follows lifts both Treasury yields and the U.S. dollar. Two-year Treasury yields jumped 18 basis points in a single session, their largest one-day rise since President Trump announced tariffs. A 25 basis point hike at the Fed's next meeting is now almost fully priced in, so the open question for markets is how large and how long the hiking cycle runs.

Fiona Cincotta, StoneX Senior Market Analyst, covers macroeconomics across U.K., European and U.S. markets, spanning forex, equities and commodities and the macro themes that move them. That coverage gives insight into how U.S. inflation data, Federal Reserve rate expectations and Treasury yields feed through to the U.S. dollar.

Key Themes

• U.S. core CPI rose 0.3% against a 0.2% forecast, reviving Fed talk of an outsized 50 basis point hike.
• Markets see a 25 basis point hike as almost certain, with a 10% chance of a 50 basis point move.
• Two-year Treasury yields jumped 18 basis points in one session, lifting the U.S. dollar against its major peers.

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U.S. Core Inflation Revives Talk of a 50 Basis Point Fed Hike

U.S. core inflation, which strips out volatile items such as food and fuel, beat its forecast and met the exact condition one Federal Reserve policymaker had set for a larger move. Before the data, Cincotta notes, Federal Reserve Governor Christopher Waller "had actually said that a higher-than-expected reading of core inflation would prompt him to consider an outsize 50 basis point rate hike". Markets have not fully followed Waller, assigning only a 10% probability to a 50-basis point move, whereas a 25-basis point hike is almost fully priced in. "I think it's unlikely that the Fed will actually go for a jumbo rate hike," Cincotta says, pointing instead to the likelihood that the hiking cycle could be extended to a third hike.

Fed Hike Pricing Lifts Treasury Yields and the U.S. Dollar

"Dallas Fed President Lorie Logan said two more rate hikes were needed, while Chicago Fed President Austin Goolsbee also warned about inflation," according to Cincotta, and that hawkish chorus is now reflected in the Federal Reserve rate path markets expect. Treasury yields climbed sharply, evidenced by the 18 basis point jump in two-year yields and a move higher in the 10-year yield. As a result, the repricing of rate expectations is lifting the U.S. dollar against its major peers. Notably, USD/JPY is testing the upper bound of a six-week range as rising Treasury yields support the U.S. dollar.

Fed Hike Repricing Shows Up in Producer Prices and Fed Commentary

Producer price inflation data and commentary from Federal Reserve officials are the next signals that show if the hawkish repricing of U.S. rates holds. Producer prices add another inflation reading after the core CPI surprise, while Fed speeches show if more officials echo the hawkish lean of Waller, Logan and Goolsbee. In currency markets, the six-week USD/JPY range shows how strongly rising U.S. yields are pulling on the yen, with a break above the range or a rejection at its upper bound each pointing to a different balance of pressure.

--- Written by Mohamed Faisal, Global Macro Content Specialist

--- Expert: Fiona Cincotta, StoneX Senior Market Analyst