The US Dollar Index (DXY) is trading just below 99.0, with potential for further falls if a lasting Middle East peace deal is reached and shipping through the Strait of Hormuz returns to normal.
Attention is on the March US CPI release, with expectations for headline CPI to rise by 0.9 percentage points to 3.4% year-on-year. Core CPI is forecast to edge up from 0.2% to 0.3% month-on-month.
Federal Reserve Focus On Core Inflation
The Federal Reserve is expected to focus on possible second-round effects from energy prices, which may show up in core inflation after several months. The CPI report is not expected to alter market pricing for the Fed unless inflation is much higher than forecast.
Higher inflation may also feed into US domestic politics, with some Republicans opposing the war and rising petrol prices. This could increase pressure on President Donald Trump to pursue a peace deal.
With inflation in the news, further near-term dollar weakness may be harder to sustain. Middle East developments are still described as the main factor for near-term moves in USD.
Looking back at the analysis from 2025, we can see the same core drivers are at play today: geopolitical tensions and inflation. The focus then was on a potential Middle East peace deal and its impact on the Dollar. This framework remains useful for assessing the market now.
Today Market Drivers And Trade Setups
While the Strait of Hormuz is calmer, we now see persistent risks from naval standoffs in the South China Sea. These tensions have kept a floor under the dollar as a safe-haven asset, much like the Mideast risks did back then. Recent data from the U.S. Maritime Administration shows shipping insurance premiums for that region have edged up 5% in the last quarter, reflecting this nervousness.
Unlike the modest core CPI acceleration we watched for in 2025, today’s challenge is stickier inflation. The latest report for March 2026 showed core inflation holding firm at 3.1%, preventing the Federal Reserve from signaling any clear dovish pivot. This keeps rate cut expectations for the second half of the year in doubt.
This dynamic helps explain why the Dollar Index is not below 99.0 as it was during that period of optimism in 2025. Today, the DXY is holding strong around the 104.5 level. This strength reflects a market pricing in higher-for-longer US rates compared to its global peers.
For derivative traders, this environment suggests preparing for continued volatility rather than a clear directional trend. We see value in strategies like long strangles on major pairs like EUR/USD, which would profit from a significant move in either direction driven by a Fed surprise or a geopolitical flare-up. The Cboe FX Volatility Index (EUVIX) has ticked up to 7.8, showing the market is pricing in more chop ahead.
Given the persistent US inflation data, a tactical trade could involve buying near-term call options on the Invesco DB U.S. Dollar Index Bullish Fund (UUP). This provides upside exposure if the Fed delays cuts further, while capping downside risk to the premium paid. With the DXY testing resistance at 104.5, such a position would benefit from a breakout towards the 105.50 highs we saw late last year.
