Why I'm Betting on a Stronger Dollar: Sticky Inflation and a Hawkish Fed

The dollar is threatening a breakout right now

The dollar index (DXY) is threatening a technical breakout above 99.3. If it can get its head and shoulders above where we consolidated this week, this could be a strong move next week.

What makes it interesting is that this is happening alongside headlines that the war is winding down. Someone asked me yesterday: "Nick, why are you bullish on the dollar if they're trying to end the war?" My answer is simple. The headlines go one way and then the other, and it is very hard to make a definitive call that the war will be over by any specific point.

What the market is telling me: dollar and oil are still elevated

If the war were truly ending, the dollar and oil should be back at pre-war levels. They are not.

Going back to early March, the dollar index is up meaningfully from where it started. Yes, it's only about 1.5%, but currencies move a lot slower, and a trend that had been heading lower has clearly turned. That reversal itself is the message.

Secretary Marco Rubio said there was "slight progress" in the Iran peace talks but rejected the Strait of Hormuz tolling system. Iran wants to impose tolls to assert it controls the strait, and the U.S. is, predictably, not on the same page. As long as these back-and-forth obstacles keep appearing, it's too early to price in an end to the conflict.

I actively avoid chasing geopolitical headlines and trying to predict what happens next. Instead, I track the macro data and the price action, and I follow what I'm actually seeing.

The Fed's conversation has changed

Six months ago, every conversation was about whether the jobs market was okay. Now it has shifted to whether inflation is under control. That shift is the whole story.

Today's Fed commentary leaned hawkish — an official said he can't rule out a rate hike further down the road if inflation persists. As inflation rises, the market prices in hikes (or simply no cuts), and yields rise with it. A rising 2-year yield is a hawkish read on the central bank, which is bullish for the dollar.

Both CPI and PPI came in hotter than expected. The University of Michigan consumer sentiment survey sits at a very low 44.8 (versus 48.2 prior), and inflation expectations jumped again. People are feeling the pinch of months of elevated gas prices.

How I've positioned

I'm already long the dollar — specifically by being short the British pound against the dollar (GBP/USD). The position is roughly at break-even right now. It's a swing trade, so I'll let it play out over the coming days and weeks.

Here's the case in one breath: inflation statistics, a jobs market that's holding up, a seasonally strong stretch for the dollar in May, and a healthy-looking daily uptrend. On top of that combination, I lean bullish.

What I'm watching

I'm very interested in the Commitment of Traders positioning data due out later today. Did institutions add to their long dollar exposure, and what's the crowd sentiment? That's the clue for the next move. A close above 99.3 is the technical trigger I care about most.

FAQ

Q: If the war ends, won't the dollar weaken? A: It could. But the market isn't convinced the war is over, and the fact that the dollar and oil remain above pre-war levels reflects that uncertainty. I follow price and data over headlines.

Q: What's the biggest risk to the bullish dollar view? A: A sudden, definitive peace deal, or inflation cooling quickly. If either materializes, the Fed's hawkish stance softens and the bull case for the dollar weakens with it.