The Return of the Inflation Trade (18-22 May)

Rising energy prices and persistent inflation pressures continued to reshape market expectations as Middle East tensions pushed oil higher and strengthened the case for tighter central bank policy.

The dollar climbed to a six-week high, Treasury yields extended their rally across major economies, and markets increasingly moved away from rate cut expectations in the US, Europe, and the UK.

Commodities reflected the shift as gold and silver remained under pressure from higher yields and dollar strength, while Brent crude advanced on renewed supply concerns surrounding the Strait of Hormuz. Fresh inflation data from the US and China reinforced concerns that energy costs are feeding more broadly into the global economy, keeping markets focused on upcoming central bank signals and economic data.

Currencies

Dollar Index: The dollar index climbed above 99.3, reaching a six-week high as Middle East tensions and rising energy costs strengthened expectations of tighter Fed policy. Recent CPI and PPI data pushed markets to rule out rate cuts this year, with attention now turning to upcoming FOMC minutes and PMI data.
Euro: The euro slipped below 1.165 against the dollar, hitting its weakest level since early April as rising oil prices and conflict-related risks increased pressure on the Eurozone outlook. Markets are now fully pricing in three ECB rate hikes amid persistent inflation concerns.
British Pound: Sterling dropped below 1.34 against the dollar, pressured by political uncertainty and rising energy-driven inflation concerns. Expectations for further Bank of England tightening also continued to build.
Japanese Yen: The yen weakened toward 159 per dollar, marking a sixth consecutive daily decline as stronger US inflation expectations supported the dollar. Rising oil prices and stalled US–Iran negotiations kept pressure on the currency, while markets stayed alert for possible intervention near the 160 level.

Commodities

Treasury Yields Tighten Their Grip on Gold

Gold traded below $4,550 per ounce after last week’s sharp decline as stronger US inflation data, a firmer dollar, and higher Treasury yields pressured prices. Markets are increasingly considering the possibility of another Fed hike, while Middle East tensions and energy infrastructure risks continue supporting uncertainty.

Brent Climbs as Supply Fears Return

Brent crude climbed above $110 per barrel as supply concerns tied to US–Iran tensions and Strait of Hormuz risks continued supporting prices. Attacks on Gulf energy infrastructure and tighter Russian crude flows added further pressure to the market.

Industrial Weakness Pulls Silver Lower

Silver fell below $77 per ounce after losing more than 13% across two sessions as stronger inflation expectations and tighter policy outlooks weakened sentiment. Higher Treasury yields and a firmer dollar added pressure, while UBS lowered its demand outlook on softer industrial consumption and rising supply expectations.

Fixed Income

US 10-Year Treasury Yield: The US 10-year Treasury yield rose to around 4.63%, its highest level since January 2025, as inflation concerns tied to higher energy costs strengthened expectations of further Federal Reserve tightening. Markets are now fully ruling out rate cuts this year and increasingly pricing in the possibility of another hike before year-end. Investors are watching upcoming FOMC minutes and PMI data for additional policy signals.
UK 10-Year Gilt Yield: UK 10-year gilt yields climbed toward 5.2%, reaching their highest level since 2008 as political uncertainty and rising oil prices intensified inflation concerns. Markets now expect around 70 basis points of additional tightening from the Bank of England, while BOE chief economist Huw Pill supported further rate increases to contain inflation risks.
Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield rose near 2.7%, marking its highest level in almost a decade after producer inflation accelerated to 4.9% in April. Rising energy costs and comments from BOJ policymaker Kazuyuki Masu supporting quicker tightening reinforced expectations for further rate hikes, while stronger demand at long-term bond auctions reflected shifting market expectations.
Germany 10-Year Bund Yield: Germany’s 10-year Bund yield climbed above 3.1%, reaching its highest level since 2011 as higher oil prices and inflation concerns strengthened expectations of tighter ECB policy. Markets are now fully pricing in three rate hikes, while ECB officials continued signaling the possibility of further action if energy-driven inflation persists.

Economic Data

United States Inflation Rate

US annual inflation accelerated to 3.8% in April 2026, its highest level since May 2023, as rising energy prices linked to the Iran conflict pushed fuel costs sharply higher. Shelter and food inflation also increased, while core inflation edged up to 2.8%, reinforcing expectations that the Federal Reserve may maintain restrictive policy for longer.

United States Producer Price Inflation MoM

US producer prices rose 1.4% in April, marking the strongest monthly increase since March 2022 and far exceeding expectations. Higher gasoline prices, transportation costs, and wholesale services drove annual producer inflation up to 6%, highlighting persistent price pressures across the economy.

China Inflation Rate

China’s annual inflation rose to 1.2% in April, supported by stronger non-food inflation and rising transport costs linked to higher energy prices and supply disruptions. Core inflation also edged up to 1.2%, while monthly CPI increased 0.3%, signaling a modest recovery in price pressures despite continued weakness in food prices.

United Kingdom Monthly GDP MoM

UK GDP expanded 0.3% in March 2026, outperforming expectations for a contraction despite slowing slightly from the previous month. Growth was mainly supported by services and construction activity, while annual GDP growth accelerated to 1.2%, marking the strongest pace since mid-2025.

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