EBC Market Strategy Brief: Navigating Inflation, Dollar Weakness, and Asymmetric Risks

EBC Financial Group outlines the latest US inflation data, the implications of a weaker dollar, and key strategies for investors as markets face sticky core inflation, new tariffs, and diverging central bank policies. Here’s what to watch and how to position your portfolio for the months ahead.

US Inflation: Softer Headline, Persistent Core Pressures

• The May Consumer Price Index (CPI) rose 2.4% year-on-year, slightly below expectations, with a monthly increase of just 0.1% driven by lower petrol prices.

• Core inflation, which excludes food and energy, remained steady at 2.8%, with housing, insurance, and services showing ongoing strength.

• Shelter costs, making up over a third of the CPI, increased by 0.3% in May.

• Markets initially rallied on the softer data, with renewed hopes for a Federal Reserve rate cut. However, EBC analysts caution that sticky core inflation and new tariff risks mean the path to lower rates is not assured.

Dollar Weakness: Short-Term Tailwind, Long-Term Uncertainty

• The US dollar index (DXY) has fallen to its lowest level since April 2022, down 3–4% year-to-date.

• The euro and emerging market currencies have gained against the dollar.

• EBC warns that dollar weakness can support global risk assets but may also reintroduce inflationary pressures in the US, especially as tariffs on over $18 billion of Chinese goods take effect in June.

• “A weaker dollar reduces import costs for other countries—but raises them right here at home,” said David Barrett, CEO of EBC Financial Group (UK) Ltd.

Central Bank Divergence: A Key Driver for FX and Capital Flows

• The European Central Bank cut rates in June, and the Bank of England is expected to follow in July, while the Federal Reserve remains cautious.

• This divergence is shaping global capital flows and FX positioning, increasing the risk of sharp market reversals if US inflation re-accelerates or policy expectations shift.

June CPI: The Next Litmus Test

• The June CPI report, due before the Federal Reserve’s Jackson Hole Symposium in August, will be critical for market direction.

• With unemployment at 4.0% and wages up 3.9% year-on-year, even moderate inflation gains could complicate the Fed’s policy decisions.

• “The June data will be a credibility test. If inflation flares while the dollar remains weak and tariffs kick in, the Fed may face conflicting pressures—supporting growth on one hand while holding the inflation line on the other,” said Barrett.

EBC’s Recommended Strategies

• Stay Nimble: Be prepared for swift reversals as markets are highly sensitive to new data.

• Diversify: Spread exposure across currencies and sectors to manage asymmetric risks.

• Monitor Policy Shifts: Watch for central bank moves and inflation data, especially the June CPI report.

• Prepare for Volatility: Avoid chasing rate cut narratives; instead, maintain flexibility and risk controls.

“This is not a time to chase rate cut narratives. Asymmetric risks are building. Investors should stay nimble, diversify exposure across currencies and sectors, and prepare for renewed volatility. The next data print could be the pivot—or the plot twist.” – David Barrett, CEO of EBC Financial Group (UK) Ltd.

Disclaimer:

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.