Inflation expectations and dollar, might diverge

Latest data from St. Louis FED reveals that inflation expectations as of last week, stands at 2.13% as measured by 5 year- 5year (5y5y) forward inflation rate.

• Inflation expectations rose from 1.94% low post FOMC, however yet to take out the high of 2.17% reached earlier this year pre FOMC.

Inflation expectations are rising with rise in oil prices. US realized inflation might move up fast should oil price rebound.

With rising retail sales and steady demand in US domestic market, core inflation is sure to move up higher.

• Next week would be interesting to watch as current inflation moves closer to March FOMC high and FED releases monetary policy results on Monday. Next week's PCE inflation index is expected to boost inflation expectation further.

Impact on dollar -

• Dollar rose much faster than US treasury yields and inflation expectations driven by speculation over rate hike.
  
  
• So bulls' might not get a boost from rising inflation expectations in the short term, however it would help to keep dollar steady in the longer run.

Dollar's drop would push actual inflation and expectations higher, providing the boost required by treasuries.