Despite the interesting surprise from yesterday's preliminary PMI data for the US in May from S&P Global, the American dollar remains overshadowed by the Middle Eastern conflict.

According to the data, the US manufacturing PMI soared to 55.3 from April's 54.5, exceeding the market forecast of 53.8. This is the highest level since May 2022: output grew at the fastest pace in over 4 years, employment reached its highest level since June 2025, and new orders posted the second-strongest result in 4 years. At first glance, this is impressive strength. However, behind these numbers lies the same story as in the Eurozone and the UK: a significant portion of the growth is explained by preemptive purchases. Clients actively increased their inventories to hedge against rising prices and supply disruptions related to the war in the Middle East. Delivery times have lengthened to the greatest extent since August 2022. In other words, production is increasing not because the economy is revving up, but because businesses fear what tomorrow may bring.

The services sector, in contrast, declined to 50.9 from April's 51.0, with a forecast of 51.2, which is a troubling sign as it is formally above 50 points but essentially on the brink of stagnation. It is evident that the services sector is headed for the worst quarter since late 2023: the influx of new orders is barely noticeable, and the war is increasingly putting pressure on demand. This encapsulates the key paradox: American industry appears to thrive on paper, while the services sector—the backbone of the consumer economy—is beginning to stall. The composite PMI ultimately remained at April's level—51.7, matching forecasts.

The inflation component of the report deserves special attention. It indicated that input prices for manufacturing rose to the highest level since June 2022, while output prices reached their peak since September 2022. In the services sector, cost inflation accelerated to a one-year high. This is a critical point for the Federal Reserve, as the central bank looks not only at overall CPI and PCE levels but also at whether price pressures are spreading across the economy—and the PMI confirms this. High oil prices due to the blockade of the Strait of Hormuz are being passed on to the costs of manufacturers, carriers, and service providers, and this process is clearly not over yet.

The overall picture for the dollar is moderately positive. A strong manufacturing PMI demonstrates the resilience of the American economy amid overtly weak data from Europe and the UK, where similar indicators have sunk well below 50. This divergence favors the dollar. On the other hand, the weakness in the services sector, combined with persistent inflationary pressures, presents a scenario in which the Fed has no good options: raising rates amid a slowing consumer sector is painful, but not raising rates while inflation accelerates means losing market confidence.

On the flip side, the dollar is currently more reactive to Middle Eastern news than to fundamental data and macroeconomic indicators. Traders are much more interested in what Trump has to say than in GDP or labor market reports.

As the times are, so is the market.