ING: Strong US CPI Could Boost Dollar as Inflation Risks Rise

Key TakeawaysING says USD may strengthen if March CPI accelerates.Rising energy prices linked to Iran conflict driving inflation risk.Focus shifts to “second-round effects” in core inflation.Fed outlook depends on whether higher costs spill into wages and prices.Dollar Outlook Hinges on Inflation SurpriseAccording to Francesco Pesole, the US dollar could gain support if upcoming CPI data shows a meaningful increase in inflation for March.The anticipated inflation pressure is largely tied to rising energy prices, driven by ongoing geopolitical tensions in the Middle East.Higher Inflation Raises Floor for Dollar WeaknessPesole noted that elevated inflation expectations may limit downside for the dollar, even as geopolitical developments remain the dominant macro driver.In this environment:Strong CPI → supports USD strengthWeak CPI → may not trigger major USD decline due to existing inflation risksFed Focus: Second-Round Inflation EffectsFor the Federal Reserve, the key concern is not just headline inflation, but whether second-round effects emerge.This includes:Businesses passing higher costs to consumersWage increases driven by inflation pressureBroader persistence in core inflationIf these effects materialize, it could reinforce a higher-for-longer interest rate outlook.Market ImplicationsThe CPI release is expected to influence:Dollar directionBond yieldsRisk assets including equities and cryptoA stronger dollar and higher yields could weigh on risk markets, while softer inflation may ease financial conditions.OutlookMarkets are entering a sensitive phase where:Inflation data is closely tied to geopolitical developmentsMonetary policy expectations remain uncertainCurrency and risk asset volatility could increaseThe CPI print will be a key test of whether inflation pressures are temporary or becoming entrenched.