Inflation Reversal and the Dollar's Next Move: Riding the Tariff Wave

The June 2025 U.S. CPI report, released July 15, underscored a critical shift in inflation dynamics. After months of disinflationary pressures, the data revealed accelerating price growth—particularly in core categories—driven by tariff-driven cost pass-through and persistent shelter inflation. This report marks a turning point for the U.S. dollar, as markets reassess the Federal Reserve's policy trajectory and currency pair valuations.

The Inflation Mechanics: Base Effects and Tariff Pressures

The June CPI showed headline inflation at 2.6% year-over-year, up from May's 2.4%, while core CPI (excluding food and energy) surged to 3.0%—its highest level in a year. Two factors are at play:
1. Base Effects: Energy prices, which fell sharply in 2024, no longer provide a disinflationary tailwind. Gasoline prices, down 12% year-over-year in May, now face upward pressure as global supply tightens and pre-tariff inventories dwindle.
2. Tariff Pass-Through: The Trump administration's tariffs on imports from Mexico, Japan, and the EU—effective since July 2024—are finally hitting consumer prices. Core goods, including furniture, electronics, and automobiles, saw price increases of 0.6% in June, contributing 0.1 percentage points to core CPI. Analysts at Goldman Sachs estimate tariffs could add 0.4-0.5% to annual core inflation by late 2025.

Policy Implications: Fed Holds Steady, but Risks Rise

The Fed's dilemma is clear: while headline inflation remains below its 2% target, core inflation's upward momentum complicates easing plans. Fed Chair Powell has emphasized “data dependence,” and June's CPI suggests the central bank will keep rates steady at 4.25%-4.50% in July. However, markets had priced in a 60% chance of a September rate cut before the report—now that probability has dropped to 40%, according to CME FedWatch.

The Fed's caution is justified. If core inflation remains elevated, a September cut becomes unlikely, and the dollar could rally further on rate differentials. Conversely, a stronger-than-expected July CPI (due July 31) could push the Fed toward tightening—though that scenario is less likely given the economy's soft landing.

Currency Pairs: EUR/USD and USD/CHF as Key Bets

EUR/USD: Targeting a Break Below 1.08

The euro has struggled as the ECB's policy divergence with the Fed narrows. The ECB's terminal rate of 4.25% is now seen as peaking in 2024, while the Fed's higher-for-longer stance keeps USD rates elevated. Technical support for EUR/USD is at 1.06, but a sustained break below 1.08 (current resistance) could push it toward 1.04 by year-end.

USD/CHF: Testing 0.90 Resistance

The Swiss franc, typically a safe-haven asset, faces headwinds as the U.S. dollar's status as a global reserve currency shines brighter in volatile markets. The USD/CHF pair has risen to 0.89, approaching its 0.90 resistance level. A breach here could open a path to 0.92, especially if geopolitical risks (e.g., Middle East tensions) amplify demand for USD liquidity.

Technical Levels and Safe-Haven Dynamics

• EUR/USD:
• Resistance: 1.08 (psychological level; break here signals further USD strength).
• Support: 1.06 (2023 lows; potential reversal point if inflation cools unexpectedly).
• USD/CHF:
• Resistance: 0.90 (key psychological barrier; sustained break signals trend continuation).
• Support: 0.87 (2024 low; potential buying opportunity).

Safe-haven flows will amplify USD gains if global risks materialize. Geopolitical tensions in the Middle East or emerging markets could push investors toward the dollar, even if inflation stabilizes.

Investment Strategy: Positioning for USD Strength

1. Long USD/Short EUR:
2. Execute a EUR/USD put option with a strike at 1.08, targeting a 1.04-1.06 range by year-end.

3. Alternatively, pair a long USD ETF (UUP) with a short EUR ETF (FXE).

4. USD/CHF Outperformance:

5. Buy USD/CHF spot near 0.89, aiming for 0.90-0.92.

6. Use a stop-loss at 0.87 to limit downside risk.

7. Hedged Equity Exposure:

8. For equity investors, overweight U.S. sectors tied to inflation expectations (e.g., energy, industrials) while using USD-denominated bonds (e.g., TLT) to hedge against rate uncertainty.

Conclusion

The June CPI report signals the end of disinflation and the beginning of a new phase where tariffs and shelter costs sustain inflation. This dynamic favors the U.S. dollar, particularly against the euro and Swiss franc. Traders should focus on technical levels and safe-haven flows to capitalize on the dollar's next leg higher.

Stay long USD—and keep an eye on those tariffs.