Resilient US growth and sticky PCE inflation have kept the Dollar supported even as risk sentiment improved on progress towards a US-Iran deal. The dollar index (DXY) has traded in a 96.00–100.00 range for nearly a year, while headline and core PCE inflation have been running above the FOMC’s 2026 projection of 2.7%. Core services less housing PCE was 3.5% year on year in April for a second consecutive month, remaining well above the pace consistent with a return to the Fed’s 2.0% target.
The Atlanta Fed GDPNow estimate for Q2 cooled to 3.8% annualised growth, down from 4.3% in its May 21 release, yet still points to above-trend expansion. May PMI data also indicates a widening US growth advantage versus peers. Separately, reports of an approaching US-Iran agreement have fuelled a rally in risk assets, with the framework said to include a 60-day extension of the ceasefire and the reopening of the Strait of Hormuz.
Dollar Outlook Amid Strong US Macro Data
Given the strength in the US economy, we see the Dollar Index (DXY) poised to break above its long-standing 100.00 ceiling in the coming weeks. As of today, May 29, 2026, the DXY is trading around 99.85, testing the very top of its range. The persistent outperformance of the American economy is providing a strong tailwind that geopolitical easing cannot fully offset.
The Federal Reserve’s hands are tied by stubborn inflation, which supports a stronger dollar. Recent data showed Core PCE, the Fed’s preferred inflation gauge, came in at 3.1% year-over-year for April, well above the 2.0% target and even surpassing the Fed’s own 2.7% projection for the year. This makes near-term interest rate cuts highly unlikely, so we should consider positioning in SOFR futures that bet on rates remaining elevated through the third quarter.
Policy, Positioning, and the Dollar’s Global Leadership
US growth continues to outpace its global peers, reinforcing the dollar’s dominance. While the Atlanta Fed’s GDPNow model adjusted its Q2 growth forecast down to 3.8%, the latest S&P Global US Composite PMI for May hit 54.4, a two-year high that sharply contrasts with the Eurozone’s reading of 51.9. This divergence suggests that derivative trades favoring the dollar against the euro, such as buying puts on the EUR/USD pair, are well-founded.
Historically, periods of synchronized US economic outperformance and a hawkish Fed have led to sustained dollar rallies, similar to what was seen in 2022. We should therefore look at buying call options on the DXY or dollar-tracking ETFs to capture this potential upward move. An upside break of the 100.00 level could trigger a rapid move towards the 102.50 area.
While progress on a US-Iran deal is improving risk sentiment, we view this as a secondary factor for the dollar. Any temporary dollar weakness resulting from this news should be seen as an opportunity to enter long positions at more favorable levels. The underlying economic fundamentals of high inflation and robust growth remain the primary and more durable drivers of the dollar’s strength.
